By Juliette Fairley
High-quality and defensive stocks, as well as high-income bonds, can help investors hold steady in uncertain times, said speakers at the MFS investment outlook on Tuesday at the Essex House in Manhattan.
While corporate America is prospering, Europe's insolvency and the Congressional super committee plan due on November 23 may impact the current upswing, speakers said.
"The stock market is discounting the political risk that exists. If bubbles are being created, it is not in stocks but rather in U.S. government debt, such as Treasuries, because of a flight to safety by large and small investors," says James Swanson, CFA, and MFS's chief investment strategist. "If there is a yield shortage out there, it is being created by the Fed, which is holding down rates throughout 2012."
"We are dealing with an enormously complex system, and developments tend to lag behind, especially in establishment surveys that measure non-farm payrolls and household surveys that measure unemployment," says Erik Weisman, manager of MFS's domestic and foreign government bond portfolios.
As for U.S. consumers, their ability to service debt is the highest in 13 years, the average credit score, at 695, is the best since 2006 and spending is up by 3.9 percent for retail sales through August 31, according to Bloomberg.
"Given the lack of job growth, the explanation is that people are working longer hours," said Swanson. "If history is any indication, we are mid cycle in this recovery and this business cycle is not as anemic as people portray it. Interest rates are on hold at 2 percent for two years. The shape of the curve is still positive."
About 60 percent of U.S. companies beat revenue estimates and 71 percent beat Wall Street earnings estimates, high by historic standards, according to MFS data. But instead of being invested in jobs, corporations are funneling money into capital expenditures, such as equipment, IT, software, factories, infrastructure and transportation.
"Labor is more expensive, so companies are relying more on technology and automation to get products to market quicker," says Swanson.
A turning point looms, however, on November 23 when the 12-member Congressional "super committee" is to propose a plan to cut $1.2 trillion from the federal deficit.