As the nation's economy continues to see a sluggish recovery, U.S. stocks will rally in 2011, with an especially strong performance among high dividend payers, a group of MFS Investment Management strategists said in November.
The U.S. economy is grinding along slowly in preparation for a "paradigm shift," the Boston-based investment firm's strategists said in a presentation at the New York Palace Hotel, and while the form of that shift is still unknown, it will likely continue the current delinking of stock market performance from gross domestic product (GDP) growth.
Since at least 1975, said MFS investment officer and portfolio manager Erik Weisman, GDP has typically seen a V-shaped recovery that brings the economy bouncing back at a rate of anywhere from 6% to almost 14% growth. This time around, though, the U.S. economy is treading water and looks likely to keep barely afloat at a rate of 3% GDP growth in 2011.
'There Is No V-Shaped Economy'
"There is no V-shaped economy, and the absence of a V will dictate economic policy," Weisman said, adding that stagnant unemployment will keep the labor market in a long-term funk. "The ramifications of the financial recovery will extend over several years—if we're lucky."
Weisman's conclusion? Historically, the nation has moved from an agrarian way of life to a manufacturing-based economy to a service-oriented society. The paradigm shift that comes next will likely involve big swings of inflation followed by deflation, and the U.S. dollar's dominance could give way to a return to the gold standard. Weisman also suggested that green industries may fuel the nation's economic engine in the future.
"The probability today that we'll be seeing shifts is high," Weisman said. "All this sounds bearish, and it is bearish, but meanwhile we can expect to see GDP growth of 3% to 3.5%."
For investors, the lesson to take away from the current recovery is that globally, stocks are no longer growing in line with GDP, said MFS chief investment strategist and fixed-income portfolio manager James Swanson. In the United States, slow growth no longer means weak S&P 500 earnings, he noted, saying that the growth of stock to GDP "has completely broken down."
With increasingly cash-rich companies continuing to build earnings, dividend-paying firms merit attention as both cash flows and inflation risks rise in 2012, Swanson added. Between now and 2012, he said, both U.S. and European non-financial company margins are forecast to exceed their 2007 peak.
Market watchers can expect to see companies spending all that pent-up cash on
