Fog on the recovery road

- "We continue to think that economic recovery is on track in most of the developed world and that emerging Asia will continue to expand robustly. On the other hand, recent U.S. developments cannot be ignored. Though we trace much of the expected Q3 slowdown in U.S. domestic demand to the unwinding of temporary stimulus, the recovery remains fragile."
- "Fiscal policy is a key source of uncertainty. At this writing the future of the Bush tax cuts, set to expire at the end of this year, is still up in the air. Unfortunately, political dithering in Washington and the resulting lack of clear guidance to investors on this issue means that the road to recovery is now fogged over– all the more so in that this fall’s midterm elections could provide a platform for protectionist rhetoric (not good either stocks or bonds)."
- "Though equity markets are likely to move higher in the coming months, the risk-reward outlook no longer warrants an overweight stance. Until some of the political dust settles, we are raising the cash portion of our model portfolio to 10% and reducing our equity exposure to a neutral 55%. Among the implications of this shift are a redistribution of our equity holdings among global regions and a realignment of our sector allocation to a somewhat more defensive stance."
- "Despite growing uncertainty, there are pluses in the prospects for equities. Double-digit earnings growth over the last few quarters has plumped up corporate treasuries, boosting their reserves of cash and other highly liquid assets. This bodes well for M&A activity down the road."
- "We are revising down our year-end index targets – the S&P/TSX to 12,100 from 12,700 and the S&P 500 to 1120 from 1280. These downgrades follow from our downward revision of real GDP growth and profits for Q3 and Q4. For the U.S. index we have also reduced our earnings multiple. Our EPS targets are now 740 for the S&P/TSX (down 7.5%) and 83 for the S&P 500 (down 2.4%)."

NBC Monthly Equity Monitor Sep2010

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