Quarterly Investment Outlook

A strong first quarter in stocks, but investors shouldn't ignore the dark clouds

By Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, April 4, 2010

NEW YORK -- Consumer confidence is rising. Corporate dividends are coming back. Markets continue to thaw.

Wall Street bankers are busier selling more stocks and bonds, and on Friday, a monthly employment report from the Labor Department showed that the country added 162,000 jobs in March -- the biggest monthly gain in three years.

In short, things are looking up. During the first three months of the year, major stock indices added another 5 percent to last year's double-digit gains, their fourth consecutive quarter of positive performance.

Carmine Grigoli, chief investment strategist at Mizuho Securities USA, says this is just the beginning. He expects the Standard & Poor's 500-stock index to rise another 12 percent by midsummer.

"The momentum and breadth of the market's recent advance, together with a revival in corporate stock purchases, seems to point to a powerful new bull market phase," he wrote in a note to clients last week.

So should retail investors, who have largely sat on the sidelines as equities soared, finally plunge back into the stock market?

Not so fast, say the bears, and they are still out there. They are quick to note that the March job gains were helped by temporary hiring for the 2010 Census. This camp is urging more caution now that asset prices have gone up further.

While acknowledging the improvement in the economy and excesses rung out from the financial system, these analysts argue that at its core, the same old problems loom: Individual debt, corporate debt, government debt.

David Levy of the Jerome Levy Forecasting Center said that even though upturns in the post-World War II period have lasted for several years, that won't be the case this time.

"Unsustained debt -- that's really what's different this time," he said.

For example, he pointed to household debt that, while recently improved, exceeds income. According to Federal Reserve statistics, the financial sector, which includes companies and government-sponsored enterprises, still has outstanding debt that is 119 percent the size of the gross domestic product. In 1990, that ratio was 46 percent.

"What this means is the private sector cannot function the way it normally does," Levy said. "This is a tremendous difference from any other cycle we've had since the 1930s. The idea we're going to jump-start the economy, and then it'll kind of kick in and drive itself -- that doesn't work here. . . . Next year is very much a question mark in my mind."

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