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See the forest AND the trees.



Equity markets continue to rise as confidence in a sustained recovery becomes more prevalent. Despite softer than expected economic data reported recently, it seems investors–like us–have shrugged off the weakness as being due primarily to the unusually frigid winter.

There are, of course, other factors at play. For instance, housing has notably slowed, due not just to weather, but both higher prices and increased borrowing costs. And yet we can remain positive on housing’s prospects fairly easily.

While prices have risen substantially off their lows, they remain at 2002 levels when adjusted for inflation. Mortgage rates are up over 100 basis points from their trough made a year ago, though they remain exceptionally low by historical standards.

The case for confidence in the U.S. economy remains exceedingly sound. Interest rates are low. Inflation is running well below 2% per year. Housing starts, currently running at just an annual pace of 925,000 units, should increase towards the 50-year average of 1,464,000. Corporate profits are at all-time highs and are expected to grow with the economy for at least another year or two. There have even been talks in Congress about actually lowering corporate tax rates, which would further improve take-home profits to investors. While the Fed is unwinding its quantitative easing program, the Board of Governors will remain accommodative for at least a couple more years. Fed chair Janet Yellen hinted on Wednesday that the first rate hike likely won’t happen until the summer of 2015 at the earliest. Yes indeed, there is good cause to be positive about the U.S.’ economic prospects.

All this positivity has pushed stock markets in the U.S. to new highs. And there’s the rub: this widespread bullishness has driven long-term expected returns to low-to-mid-single-digits. Put another way, there is much that must go right in order to justify current market levels. It is for this reason that our expectation for further economic growth over the next year or two is coupled with some uneasiness. The good news is largely baked in the cake.


This letter was also featured @ Advisor Perspectives.

This material contains the current opinions of the author but not necessarily those of Black Cypress and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without proper reference. Past performance is not a guarantee and may not be a reliable indicator of future results. ©2012, Black Cypress Captial Management