U.S. economy growing, but slowly

By Dirk Hofschire and Lisa Emsbo-Mattingly, Fidelity Investments

The U.S. economy remains in a slow mid-cycle expansion, with few evident signs of late-cycle pressures.  Inventories are still in check, despite recent data indicating slower growth in orders. Credit is not tightening, as banks continue to ease lending standards on the margin, monetary policy remains highly accommodative, and overall credit growth maintains its upward trend. Corporate profit growth has decelerated, but overall profitability appears solid. In general, mid-cycle expansions have historically provided a supportive backdrop for more economically sensitive assets—such as stocks and high-yield corporate bonds—relative to cash and other defensive assets.

There are two primary risks to this overall benign economic trend. The first risk is external. Sluggish global demand is weighing on U.S. exports and global corporate profits, while eurozone problems threaten to inflict greater investor de-risking and bank deleveraging on worldwide financial markets. The second risk is the impending U.S. fiscal cliff of tax increases and spending cuts that are due to take effect at the beginning of 2013. Our base-case scenario is that policymakers will take action to avoid the full brunt of the fiscal cliff, which, if not averted, could push the U.S. into recession and drive corporate profits down 20%–30%. However, action seems unlikely prior to the November elections, and elevated uncertainty could curb business, investor, and consumer confidence in the months to come.

As a result, tactical concerns about policy and global economic risks make us cautious on the risk-reward outlook for many riskier asset categories such as stocks . Although the mid-cycle dynamic in the U.S. provides a more favorable investing backdrop than in many non-U.S. economies from an asset allocation standpoint, our cautious tactical view continues to override our more positive business-cycle outlook at this stage.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

9951 Atlantic Blvd, Suite 323, Jacksonville FL 32225