Following is an assessment of the current market environment from Henry Herrmann, CEO and Chairman of the Investment Policy Committee, and Mike Avery, Chief Investment Officer.
As we think about the world at large within the context of the market pullback in recent weeks, which we could call a correction, we’ve observed a rather perverse truth: the more rattled that people are, the better it looks with respect to where you think the market might be heading next. The rally that we’ve enjoyed since March of 2009 has been a grudging one; despite the market’s 70 or 75 percent gain, investors have gone kicking and screaming the whole way. And once we get a correction, many pundits have announced
“See, we told you this wasn’t going to last!”
It may sound contrarian, but our outlook is fairly optimistic. In the short term, meaning the remainder of this year and through the middle of 2011, we think corporate profitability should be pretty good as a function of actions taken by company managements in the fourth quarter of 2008 and first quarter of 2009. In addition, even though the media spends a lot of time talking about the number of people who are not employed, the reality is that 90 percent of the people in this country who want a job are employed and they seem to be spending their wages at retailers, restaurants, car dealerships, etc. The banks are open and life is moving on. In addition, unlike the Europeans, who have a debt management problem that was made apparent to them some time ago and failed to act quickly, at least U.S. policy makers saw the house was burning and threw enough water on it to put out the fire. Only the benefit of history will decide whether all the decisions were good or bad.
Profitability returns, optimism in emerging markets
Circling back to profits and how that scenario may be less than joyful going forward: We’re getting a fairly good level of profitability and earnings for the S&P 500, which looks like $80 to $90 for 2010 and maybe $90 to $100 for 2011, meaning, in our view, that the S&P 500 is fairly cheap. On that metric, the way we’re getting those earnings could be through a set of decisions that may not be sustainable. What we mean by that is company CEOs reduced inventories and headcount as quickly as they could, which resulted in pre-tax margins going up at a time when they didn’t want to increase the leverage on their balance sheets, or at least were preparing for higher tax rates going forward. This has had an impact that we think will mitigate itself somewhere toward the middle of 2011. In addition to that, the markets are still dealing with solvency issues, obviously most recently in Europe. We think that the United States, by virtue of being further in the queue has resolved a number of its issues. That doesn’t mean that problems don’t remain, but at least we’re not facing a raging bonfire.
We remain very optimistic on the outlook for the emerging markets—specifically China, but also Brazil, India, Korea, Taiwan, Turkey, Indonesia, due to their respective actions for dealing with a slowdown in either their exports or domestic consumption, combined with balance sheets that are not nearly as levered as those in the United States or Asia. We think that will result in growth in those countries being very good—not only this year but also going forward.
No bubble
Finally, a point you’ve heard us talk about quite a bit lately is China’s ability to sustain an above-average rate of growth. We think the market has been too focused on property markets in the Tier 1 and Tier 2 cities, when in fact the policy makers in China have been focusing on increasing the level of domestic consumption. They’re shifting the dynamics of their economy away from export growth to the so-called developed world and increasing domestic consumption and, further down the road, increasing exports to the places in the world they expect growth on an ongoing basis: Central Asia, the Middle East, other parts of Asia, Brazil and India.
A self-sustaining recovery
In summary, we believe what the market is struggling with right now is determining what the growth rate is going to be, not solvency issues. Europe and China have influenced sentiment in that regard. To some extent, the market has gone from anticipating a V-shaped recovery to concerns about a double dip. We’re not in the double-dip camp, nor were we in the sustainable V-shaped camp. We think we are in a sort of self sustaining economic recovery – meaning the government isn’t the only reason for expansion. We don’t know if that’s the right point of view or not; that will hinge on what happens to job growth. Our impression from listening to a lot of companies that we’ve met with is that the expansion is underway and it’s a pretty good one. It likely will slow down a bit, but not dramatically, and job creation will happen. We don’t think it will be 250,000 jobs every month, but we do think we’re on our way to that. That said, if the job situation doesn’t maintain its momentum, then we’ll have more discussion about a double dip. From our point of view, the economy is moving in the right direction, earnings will follow and ultimately so will stock prices. We aren’t calling the bottom, but we believe we’ve seen the majority of the pullback already.
Why Ivy Funds?
Ivy Funds is an exceptional combination of investment managers that offers global reach and capabilities to advisors and their clients. Ivy seeks to enable its fund shareholders to remain comfortably committed to their long-term goals. We are:
Proven: We’re part of an organization whose roots date to 1937, with an investment style emphasizing participation in positive markets and, especially, seeking to manage risk.
Focused: We do our own work, believe in our own research and act on our own ideas. Our steady approach is guided by a belief in fundamentals over fads.
Constant: We say what we mean, and do what we say. What we value most, and remember every day,
is the trust that we have earned, and must continue to earn, from our shareholders.
The Ivy Funds are managed by Ivy Investment Management Company and distributed by its subsidiary, Ivy Funds Distributor, Inc.
Past performance is not a guarantee of future results. The opinions expressed are those of Hank Herrmann and Mike Avery and are not meant as investment advice or to predict or project the future performance of any investment product. Henry Herrmann is Chief Executive Officer of Waddell & Reed Financial, Inc. Waddell & Reed Financial, Inc. is the ultimate parent company of Ivy Funds Distributor, Inc. The opinions are current through May 24, 2010, and are subject to change due to market conditions or other factors.
Investment return and principal value will fluctuate, and it’s possible to lose money by investing. Consider all factors. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the fund’s prospectus. S&P 500 is an unmanaged index of common stocks. It is not possible to invest directly in an index.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus carefully before investing.