Fiscal tightening won’t cause a recession in 2013, says Michael Darda, chief economist and chief market strategist at MKM Partners. The latest unemployment benefit claims number fell to a five-year low and is a leading indicator for the labor market. Housing starts are strong though they are at a low level. The upswing is gaining momentum indicating some firming rather than a deceleration, Michael noted.
Expectation for economic growth is pretty subdued for 2013; the Bloomberg consensus is two percent, similar to what was witnessed last year, he noted. But the forward financial and monetary indicators are saying the growth forecast may be 100 basis points (one percent) too low despite the so-called fiscal drag, he added.
Asked if he has a two-pronged strategy to deal with the debt-ceiling debacle: one when we get through this debacle and one until we hit that debt-ceiling, Michael said that could be problematic as was experienced during the so-called fiscal cliff. A lot of investors chose to move to the sidelines till the issue was resolved while the market went through new highs during the so-called crisis, he noted. So it’s not probably wise to design a strategy around the debt-ceiling. If the outlook is upbeat, you’d rather buy on weakness rather than selling on strength.
Asked to name the sectors that he would like to stay invested in this kind of an environment and considering the fundamentals, Michael said considering the ten basic sectors of the S&P 500, the cheapest sectors are the cyclicals like tech, materials and industrials.
The most expensive sectors based on a 10-year average and using the forward P/Es are some of the defensive sectors like telecom and utilities, he noted. So it’s better to stay invested in cyclicals and stay away from some of the defensive areas that look fairly lofty.
Also, going global is an option as emerging markets are expected to outperform developed markets in 2013, he noted. China will have a good year again in 2013 from the equity market perspective and European equities are likely to outperform the S&P 500 this year.
The financial conditions indicators and the monetary indicators have turned up in the eurozone and Europe should come out of recession this year, he noted. It will not be a boom, but it will be growth even though expectations are very subdued. Earnings should also recover in Europe this year, he added.
Asked to comment about the performance of the banks in the fourth quarter where net interest margins of some of the biggest national and the regional lenders got squeezed, Michael said this has been an ongoing issue.
But if the business cycle recovery can continue and even pick up a bit with a stronger labor market and housing, there is money to be made even from just basic business and consumer lending. Also, long-term interest rates may get a lift if business cycles gather steam, helping ease pressure on interest margins. You can watch the video here.
Contact Ulli