Capital Markets Outlook
CMO October 2008
CMO July 2008
First Quarter 2008 Economic and Market Outlook
Economy and Interest Rates:
- GDP Growth trending lower to a 1.5% to 2.0% annual rate from 2.25%-2.50%
- CPI Inflation decreasing slightly from 4.1% in 2007 to 3.2% in 2008
- Core Inflation remains slightly above the Federal Reserve’s target range of 1-2%
- Corporate Profits slowing to 5-6% increase in 2008 (from 8% in 2007); Profit Margins key
- Federal Reserve cut the Fed Funds and Discount Rates to 3.00% and 3.50%, respectively
- Yield Curve no longer inverted, reflecting global growth, inflationary fears, and Fed rate cuts; 10-yr. Treasury trading in 3.50-4.25% range
- Oil prices, domestic politics, world events, dollar rally remain wildcards in any scenario
- Sub-prime lending, rising foreclosures, and soft housing market remain concerns
Equity and Bond Markets:
- Large-cap stocks rise as multiples and earnings expand
- Small- and Mid-cap stocks underperform Large- and Mega-caps
- International stocks, including selective Emerging Markets, do well on the back of declining dollar
- Bond Market has a coupon return
Asset Allocation:
- Stocks expected to slightly outperform Bonds (6-8% annual return versus 4%)
- Stay with high quality Large- and Mega-caps over Small and Mid-cap stocks; Growth favored over Value in Large-cap space
- Selectively move Bond Durations to benchmark levels; look for opportunities to extend on interest rate spikes
2007 Benchmark Year-End Results:
- S&P 500 total return: 5.5%
- Dow Jones Industrials exceeded S&P 500 by 3.3% (8.8% total return)
- NASDAQ best domestic performer with 10.6% annual total return
- Lehman Intermediate Gov’t Credit Index: 7.4%
- MSCI Large-cap Growth outperformed Value by 10.5% (11.7% vs. 1.2%)
- MSCI EAFE Index total return: 11.2%