For Investors, the Economy May Be “Just Right”


In a video presentation discussing the post-presidential election outlook for the U.S. economy, four senior Legg Mason investment leaders focused on prospects that we may be reaching a “Goldilocks zone:” not too hot, not too cold, but just  right.

“This is not the start of a new bull market,” declared Scott Glasser, Co-Chief Investment Officer of ClearBridge Investment. “This is potentially the extension of an existing and mature bull market. How long do we extend that growth? There’s going to be some very strong offsetting negatives that retard that growth, whether it be the dollar or higher rates. Internationally all the factors that had been in place are not going away. The market has rallied in  anticipation.”

“I do think you’re going to get this growth, but I think it needs to be put in the context of a mature bull market. That has the opportunity to be extended for a year, two years. We’ll  see.”

James H. Norman, President of QS Investors, replied, “Do you see the potential for there to be, because of those countervailing forces, a Goldilocks [zone] – or if not too hot, not too cold? Employment growth continues at a reasonable level so it does not get  overdone?”

Mr. Glasser agreed, and thought corporate profits will increase, slowly but  surely.

But, “I don’t like the word ‘Goldilocks,’” Mr. Glasser said. “You [should] get huge repatriation. I think that’s a big positive. The last time we did this, in 2005 I believe, there were $600 billion overseas, and approximately $300 billion came back to us. Right now there’s approximately $2.4 trillion overseas. There’s a potential for over $1 trillion cash to come back through  repatriation.”

“That money will get put to work,” he continued. “It may not be put into capital expenditures (CAPEX). It may be used to support share buybacks, or it may be used to offset some of the significant debt that’s been put on balance sheets. You get to extend share programs for the next three, four, five years. Those are all  positives.

“That is the ideal scenario: ‘Goldilocks’ in the sense that you get a little bit of growth, you don’t get inflation, rates stay within a moderate range. It’s not about the market as a whole, it’s much more dependent on which sectors benefit, and why. You’ve seen financials react because of the prospect of less regulation and higher margins. That’s good for stock  pickers.”

Messrs. Glasser and Norman were joined by Jack P. McIntyre, a fixed income portfolio manager with Brandywine Global, based in Philadelphia. He agreed that financials may  benefit.

“I’d like to add in tax cuts, but regulation too,” Mr. McIntyre said, “because for eight years it seems as though the administration sort of had its hand on the throat of the banking industry. It hasn’t been necessarily a pro-business type of environment. The U.S. consumer is in pretty good shape, their balance sheet is in good shape. We’re seeing wages improve. At this point debt service costs are still low, but it’s the corporate sector that’s been missing in action. If they can ramp up the CAPEX, these capital-intensive projects, it’s going to certainly help  productivity.”

“We have to unleash these animal spirits,” Mr. McIntyre continued. “We get entrepreneurs, we get wealth-creating activities. That’s part of a good environment for 2017, but 2018 and 2019 too. That certainly can keep growth moving forward and extending the business  cycle.”

Another Legg Mason fixed income portfolio manager, Carl L. Eichstaedt of Western Asset Management, saw optimistic possibilities for U.S. bond  markets.

“The Goldilocks scenario would be Trump’s policies at 50/75 basis points of GDP,” he said. “So instead of mid-high-ones or low-mid-twos, inflation stays contained: 2 percent, plus or minus. Corporate profits remain strong. Debt coverage remains good. Corporate bonds in that environment do very well, also securitized mortgage products, both residential and  commercial.”

Mr. Glasser added, “Profit growth is probably high-single-digits in that scenario, versus a baseline of probably 3 or 4 percent right  now.”

That led Mr. Norman to concur, “It’s important to keep the consumer going as well. So much of GDP growth can come from the consumer. We’re starting to see that a little bit, people feel a little more comfortable. Some of the consumer sentiment numbers as well as consumer spending has started to firm up and be a little more attractive. If we can keep that going … I think that could be quite attractive in terms of corporate profit  growth.”

About Legg  Mason
Legg Mason is a global asset management firm with $707 billion in assets under management as of November 30, 2016. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol:  LM).

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual  investors.

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