In future issues, we will explore these issues in much more detail and try to develop a framework and process for asset allocation for investors with the objective of being relatively simple, and hopefully, useful. For now, we will review our main macro views and investment conclusions.
Macro Outlook
One of the essential macro themes in the U.S. and Canada for the rest of 2010 will be a relatively strong corporate sector, characterized by good balance sheet liquidity, rising profits and capital spending (Charts 1-3). This will continue to be offset, in part, by a weak housing market, consumer spending, employment and fiscal retrenchment. A continuation of highly accommodative monetary policy is assured. The recovery is intact, but will slow significantly and remain uneven, with risks to the downside.
Ideally, as the business cycle moves through the expansion phase and valuations become stretched, conservative investors should be taking money off the table, moving assets into cash and bonds. However, in the aftermath of a global financial crisis, the usual assumptions about business cycle dynamics and timing are often different. This recession was not triggered by a policy response to overheating as is the case in a typical recession, but by a burst credit and asset bubble. Consequently, economic expansion depends on much more than a monetary policy response.
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