One of the more intriguing aspects of the tactical approach is its ability to address what some strategists believe will be the new market reality once the economy rebounds: Stock returns aren't likely to be as high as they once were, and fixed income will help make up the difference.
The relative safety of bond ETFs over stock ETFs is clear during a recession, but some strategists believe the proliferation of fixed-income vehicles over the past two years doesn't reflect a temporary defensive stance among investors biding their time until the bull market resumes. After the jolt of 30% to 40% portfolio losses last year, investors are reassessing risk and seeking assets with a true negative correlation to stocks. That's likely to continue for the next three to five years, says Anthony Rochte, senior managing director at State Street Global Advisors (STT) in Boston.
For Richard Hughes, co-president of Portfolio Management Consultants (PMC), the enormous investment inflows into fixed-income vehicles reflects a desire among investors to take advantage of unprecedented spreads that may offer once-in-a-lifetime yield opportunities—and recognition that consumer spending will be less of a driver of corporate earnings.
It's hard to see how equity valuations will be able to return to pre-recession levels, says Hughes, "in a society that is and spending less than it once did."
(from Business Week, April 30, 2009)
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