Colas: US Economy In True Uptrend
February 22, 2013
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The variables are many, no doubt, but the U.S. economy is getting better even if Washington could still “screw it up,” ConvergEx Chief Market Strategist Nicholas Colas says. Speaking to IndexUniverse.com Managing Editor Olly Ludwig recently, Colas argued that both the U.S. and Europe seem to be on a path of healing that presents many opportunities for investors.
IU.com: Let’s talk about the macroeconomic situation. We have a recovering real estate market, an energy sector that is exceeding everyone’s expectations, but also all the craziness in Washington that gives people much reason for pause. How do you integrate all these different variables?
Colas: The challenge is clearly on the plus side. The economy is getting better. And anybody who’s seen several cycles will recognize it’s the beginning of a true uptrend. And we’ve had it only for about six months. The recovery from the lows of March 2009 were more about a basic recovery in the financial system, and now we are actually getting to the economic expansion phase of the recovery and risk assets.
The single biggest challenge for the year is going to be that Washington could still screw it up. There are still many opportunities either from the sequestering negotiations that have to happen by March, or the longer-term negotiations about the federal debt limit, which will happen towards the middle of the year. The bottom line is, if you're going to shut Washington for an entire year, and not let anybody into that town, the S&P 500 will probably be 10 percent higher than it will otherwise be, because they have to get involved.
IU.com: How about Europe? It seems to me that that storyline has sort of changed qualitatively.
Colas: It seems to me that the ECB, with its last round—what they called the OMT—has finally convinced the markets that they stand behind the common currency and stand behind long-term fixes for the countries that will need a lot more capital to get through the next couple of years. I think prior to that, both politically and from a monetary policy standpoint, the market was not convinced the ECB could really stand up and defend the currency and defend the currency union.
But I think, with that step, you finally have some realization that, yes, they really are behind the currency 100 percent. Things could still fall apart. But the ECB still has a lot more firepower behind it to fix any kind of temporary problem.
IU.com: Apart from that, is there some kind of incipient healing that’s actually in place, such that it’s a different proposition from a debt-obligation point of view for some of these Southern European countries?
Colas: It is strictly a central bank issue. But I think you're on the road to the right track, in that the question is, if you go from five to 10—and obviously bigger numbers are worse—that’s a 100 percent move. And things feel very bad. That’s what we were last year. If you go from 10 to 11, it’s only a 10 percent move. And that’s kind of where we are this year. Things aren't getting better in Southern Europe. But they're just getting bad at a less increasing pace.
What economists will logically do is begin to extrapolate the term. And that’s what markets have done as well: begin to extrapolate a term that says, even if this year is worse than last year, from all the basic macroeconomic standpoint questions—unemployment, GDP growth, expansion of the financial markets—could next year be the turn? And if they are, then capital markets will begin to discount the middle of this year.