Portfolio Manager Perspectives

Jeff Benjamin

Advanced Equities' Wright: Recovery not forthcoming

Nov 29, 2009 @ 12:01 am

By Jeff Benjamin

Financial advisers and investors must bear in mind that consumers won't be in a position to support their normal share of economic growth, according to Brian Wright, head trader and co-portfolio manager with Advanced Equities Asset Management.

Like a lot of market watchers, he is banking on an inventory restocking cycle to generate some corporate-revenue growth over the next few quarters. But beyond that, he said, the harsh reality of lowered consumption by U.S. consumers will hold back any recovery.

Through the third quarter, the year-over-year inventory decline was at 13.4%, and those inventories will have to be replenished, Mr. Wright said. “But by the second half of next year, the consumers will have to come back in a sustained way” if the economy is to bounce back, he said.

Mr. Wright pointed out that savings rates have risen as consumers have paid off debt and hunkered down to wait for better times.

According to the latest data from Ned Davis Research, at the end of June, the minimum debt service payment on mortgages and other loans, as a percentage of disposable income, was 13.1%, which compares with an average of 12% since 1980. The current level is down slightly from the 2007 peak of 13.9% but remains way above prior cyclical lows of 10.6% in 1983 and 10.7% in 1993.

Another measure of the state of the consumer is household debt as a percentage of disposable income, which is now at 125.6% and compares with an average of 78.4% since 1952.

“We don't believe this is going to be a typical V-shaped recovery,” Mr. Wright said.

Although corporate earnings reports have been stronger than expected over the past two quarters, he pointed out that the stock market “has been pricing in a lot of the good news.”

Consider, for example, that while earnings reports over the past three quarters have become more positive, the stock market's performance during the respective earnings seasons has been muted.

During the first-quarter earnings season, the market gained 15.1% during the roughly four-week period between the first earnings report from an S&P 500 company and the last.

During the second-quarter earnings season, when a then-record 73% of S&P 500 companies beat consensus estimates, the index gained 9.5%.

And during the period following the most recent earnings season, when a record 80% of companies beat estimates, the index gained 2.8%.

“The market has gotten ahead of earnings,” Mr. Wright said.


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