Pioneer’s Views on the Economy and Markets

With 2013 upon us and the “fiscal cliff” scare in Washington finally dealt with, investors are now turning their attention to what the investment environment might be like for the remainder of 2013. In the following article, Sam Wardwell, Senior Vice President and Investment Strategist at Pioneer, provides his views on current macroeconomic conditions and what conditions may possibly develop as the year progresses.

Economic growth for the U.S.

We believe that U.S. growth will probably remain at around 2% for another year. U.S. government austerity measures should dampen growth somewhat, but we believe those negative effects will be balanced by strength in the private sector.

Our belief is based on several factors:

• Consumer spending should be a tailwind for the economy, as household balance sheets have been deleveraged. In addition, house prices have improved and the number of people working, the length of the average work week, and average hourly wages all have trended up in recent months.
• The housing market should be a tailwind for the economy, relative to the past couple of years, but deficit-reduction measures likely will act as a drag on growth. The year-end “fiscal cliff ” deal and sequester will, in all likelihood, hurt the economy more than the improved housing market will help it.
• Business capital expenditures should be stronger in 2013. Businesses really held back in 2012, a year during which China, Europe, and Washington made everyone nervous. China’s economy probably has begun to reaccelerate, but Europe hasn’t turned the corner yet. That said, we believe that economic conditions in Europe likely will bottom out and start growing again sometime around mid-year.
• Strong domestic energy production will reduce the U.S. trade deficit, and lower energy prices (Pioneer’s prediction) will help.
• Lastly, while we are seeing fiscal austerity at the national level, state and local revenues have begun increasing again, so there may be less austerity outside of Washington.

Expectations for interest rates

The Federal Reserve Board (the Fed) has projected that the benchmark Federal Funds rate will remain in the 0% to 0.25% range until the unemployment rate falls to around 6.5%, or inflation threatens. We believe neither is likely to occur in 2013. Longer term, the “doves” outnumber the “hawks,” and Fed Chairman Ben Bernanke resides firmly in the “dove” camp, and so we expect the Fed likely will be too slow, rather than too quick, to increase rates. For now, Pioneer’s forecast is for “no change” in Fed policy.

Emerging markets equities over U.S. equities?

Pioneer’s global asset allocation team currently has our portfolios tilted toward emerging market equities relative to U.S. equities.

The main reasons for this tilt are:

• Subpar U.S. economic growth and the headwinds from fiscal austerity should limit profit growth prospects for U.S. companies.
• China’s economy is recovering, and many emerging economies have more ability to deploy fiscal and monetary policy stimulus than do Europe or the U.S. (that is, they are not out of stimulus “bullets”).

Things that keep us up at night (outside of the fiscal policy debate, Europe’s troubles, and geopolitical tension in the Middle East)

These really remain the “big three” concerns, but we feel better about them than we did a year ago. The “debt ceiling” and “fiscal cliff” risks have, we think, been reduced to only moderate headwinds to the economy. Fears about the European banking system and government bond markets have been quelled significantly. Also, there is little talk of war. In general, the major downside risks appear to be much diminished.

As always, we will be watching the economy closely. Key questions this year will be whether U.S. employment growth continues and how the economies of Europe and China will fare. Longer-term U.S. fiscal policy remains our largest worry, as controlling future deficits without cutting entitlement spending is a daunting task.

We’re not quite sure what our other main concerns should be, but the essence of a surprise is that you don’t see it coming.

At Pioneer, we have long advocated the benefits of investing for the long term. Our advice, as always, is to work closely with a trusted financial advisor to discuss your goals and work together to develop an investment strategy that meets your individual needs.