Prudential's midyear market and economic outlook gathering always gathers smart analysts, but in this year's gathering in New York on Wednesday, the consensus for economic growth was varied.
"When we write these white papers," said panelist Ed Keon (left), managing director of Quantitative Management Associates, "we usually get four or five people to sign on, but not this time." That's because Keon's fairly bullish view on the economy—"I expect next year we'll see several quarters of 5% GDP growth"—wasn't fully shared by fellow speakers, including Quincy Krosby and John Praveen. Keon's argument for greater growth next year was based on his belief that the drags on the economy that we've seen this year, including tax increases and the sequester, would no longer be such an influence in 2014.
"I think of the economy as Secretariat ridden by a sumo wrestler," Keon quipped, saying "we're about to head into rapid GDP acceleration." In fact, "we should be in a recession now" because of government policy on taxes and spending, he argued, but instead, "the underlying private economy is doing well."
The reasons for his "insane optimism?" They include the housing rebound, the slowly healing employment picture, better access to credit and pent-up consumer demand. "We've made back the wealth that evaporated" during the financial crisis, he said.
An example of an industry poised for significant growth is autos, he said, predicting that with the average car on the road being 10 to 11 years old, pent-up demand may well push annual unit sales to 20 million, up from the pre-crisis average of 17 million new cars sold annually, and significantly higher than the annual sales of 10 to 15 million that have occurred since the crisis.
Michael Lillard, Chief investment officer of Prudential Fixed Income Management, argued that the "downside risk to the economy has tempered," which is why Federal Reserve Chairman Ben Bernanke is talking about tapering off bond buying.
"The Fed is saying that quantitative easing is an emergency tool," and now that we have a housing recovery and growth in GDP, "the emergency is over.
"we believed yield has overreacted" to the Fed's statements on eventually ending QE, Lillard said, adding that he sees plenty of opportunities in fixed income, especially in the credit sectors. He mentioned specifically high-yield corporate bonds, where "defaults are low and will remain low," with issuers exhibiting strong balance sheets. He also says commercial mortgage-backed securities are "attractive," and sees opportunities that still exist in emerging markets, such as longer-term Mexican sovereigns.
Speaking last, but certainly not least, Quincy Krosby (left), chief market strategist for Prudential Annuities, brought the discussion back down to earth, saying there was often a "disconnect between economic fundamentals and the markets." She noted that the global search for yield continues, citing the recent oversubscription of Rwanda's first dollar-denominated 10-year bond offering (single B-rated Rwanda issued its 8-times-oversubscribed debt at a yield of 6.875%).
