Report identifies ‘dollars, debts, and demographics’ as key economic forces
Capital Markets Forecast 2013 QE and Stock Prices ChartAs shown in this chart, periods of Federal Reserve asset purchase programs have coincided with notable run-ups in the level of the S&P 500 Index.
Capital Markets Forecast 2013 Public Debt ChartThis chart highlights global research that found that rates of inflation adjusted economic growth tend to be lower when ratios of gross national debt to economic output top 90%. The ratio of gross U.S. federal debt to gross domestic product crossed this threshold in 2010 and has remained above it since then.
Capital Markets Forecast 2013 Graying of America ChartThis chart depicts the graying of America, where a generation from now, 65–90 year-olds are expected to account for nearly a quarter of the population, up from the roughly 16% that has prevailed for two decades.
Capital Markets Forecast 2013 Economic Scenarios ChartThe seven-year forecast reflects WTIA's assessments of the likelihoods of six potential scenarios and forecasts for growth in each case as summarized in this chart.
The forecast, crafted by the Investment Strategy Team at Wilmington Trust Investment Advisors (WTIA), predicts modest returns on stocks over the seven-year span of the outlook. The team is more optimistic about emerging stock markets, value-oriented large-cap stocks in developed international markets, and non-core bonds, such as sovereign debt of emerging economies and speculative-grade corporate bonds.
“Investing is a long-term proposition,” said Rex Macey, WTIA’s chief investment officer. “While a myriad of competing economic and political forces will perpetuate a tepid recovery over the next few years, there are opportunities for the diligent investor.”
DOLLARS, DEBTS, AND DEMOGRAPHICS
The Capital Markets Forecast includes concerns about the ability of world leaders to drain excess liquidity from the global financial system. While only a 2-percent annualized inflation rate is predicted for the U.S. over the seven-year outlook, the “tidal wave of stimulus” issued by central banks continues to boost financial asset valuations, leading to below-average expected returns.
Just as the world is awash in dollars, it is also steeped in debt. The total debt of the United States, including households, for-profit and not-for-profit entities, and all levels of governments, hit $53.1 trillion at the end of the third quarter of 2012, an amount equal to 3.9 years’ worth of all goods and services produced domestically. In 1982, national debt amounted to just 49 weeks’ worth of U.S. economic output.
The Investment Strategy Team also cites concern over the “graying” of key populations of the global economy. As U.S. Baby Boomers enter retirement and transition from accumulators of savings to consumers of savings. This demographic shift will likely generate headwinds for the markets. In many emerging markets the demographics are more favorable supporting investments in those markets. On the bright side in the U.S., the Echo Boomers will be helping to support the housing market in a few years.
SIX U.S. ECONOMIC SCENARIOS
The forecast also examines six potential scenarios and their potential effect on economic growth:
• Slow growth with normalization
• Slow growth with persistent economic repression
• Global policy success
• Prolonged European / Chinese under-performance
• U.S. policy failure
“In spite of continuing threats to the economy, many economic resources remain in surplus in the U.S. including manufacturing, housing, and labor,” said Macey. “Additionally, we see a light at the end of the tunnel. By the end of our forecast horizon in 2019, the U.S. will be ten years removed from the end of the Great Recession, and economic growth and the financial markets should have normalized by that time.”
For more detailed analysis and projections, including forecasts and biases for asset classes, read Wilmington Trust’s 2013-2019 Capital Markets Forecast commentary.
ABOUT WILMINGTON TRUST INVESTMENT ADVISORS
Wilmington Trust Investment Advisors provides clients with access to quality investment advisory and asset management expertise including equity, fixed income, and alternative strategies. WTIA had over $19.7 billion of assets under management as of Sept. 30, 2012, and it also oversees the investment processes of Wilmington Trust and M&T Bank, which had $40.8 billion of assets under management as of Sept. 30, 2012.
ABOUT THE INVESTMENT STRATEGY TEAM
WTIA’s Investment Strategy Team undertakes a multi-year forecast of financial market performance annually. The IST analyzes valuations and global economic scenarios to develop its forecast for longer-term market performance, as well as shorter-term trends in securities prices. The IST aims to deliver higher-than-benchmark total returns for investors based on varying appetites for risk. The forecast underscores the importance of diversification among a variety of asset classes.