March - CI Investments

COMMENTARYthat the recovery is beginning to gain traction. The Institutefor Supply Management (ISM) data has been signallingexpansion for a number of months. That trend continues asthe ISM announced that its composite index rose to 55.4 inMarch, up from 53.0 in February, and better than consensusexpectations of 54.0. Earlier, the ISM had reported that itsfactory index rose to 59.6 in March, its highest level sinceJuly 2004. The latest release indicates that the recoverymay be broadening out beyond manufacturing into servicesegments. Service industries expanded in March at the fastestpace since May 2006. The ISM’s gauge of new orders grewto 62.3 in March, the highest mark since August 2005 anda significant jump from February’s 55.0 reading. Finally,export orders improved last month as well, rising to 57.5 from47.0 in February.An important element of the recovery picture fell into place,when the Bureau of Labor Statistics (BLS) reported that nonfarmpayrolls increased 162,000 in March, the best showingin three years. Total job growth came in somewhat belowexpectations of 184,000, because census hiring was belowexpectations. Private sector job gains, on the other hand,were better than expected at 123,000. The BLS’s householdsurvey (which includes small businesses) showed a gain of264,000. We think the resumption of job growth shouldprovide an important psychological boost to both businessesand consumers, as job losses during the recession generatedan enormous amount of media attention. As encouragingas the data are, with the unemployment rate remaining at+9.7% and the underemployment rate still higher at +16.9%,we believe the Federal Reserve will feel little pressure toboost the Fed funds rate any time soon, even if job growthaccelerates in coming months, as we expect.growth of about 37%, according to Thomson Reuters.They are also expected to see revenue growth averagingabout 10%, the second quarterly gain in a row after fourconsecutive declines. The resumption of revenue growthcould turbocharge earnings growth rates for many companieswhose strong earnings performance up to this point has beendriven largely by cost cutting.Bottom-up consensus 2010 EPS estimates for the S&P 500Index are approaching $80 per share, according to ThomsonReuters, while expectations for 2011 are about $96.50. It isuncertain at this point whether these expectations will berealized or not, but if they are anywhere close, then the S&P500 at about 15x 2010 estimates and 12.5x expectations for2011 is very reasonably priced.In summary, we believe most investors remain far toopessimistic about the outlook for equities. The economy isclearly in recovery, corporate earnings are booming and stocksare not expensive. With the Fed likely to be on hold until latethis year due to moderating rates of core inflation, slack inthe economy and continuing high rates of unemployment,we think we are in the sweet spot of the equity investmentcycle. Stocks are clearly not as cheap as they were a year ago,but they are still attractive, in our view, especially relativeto cash – which yields next to nothing – and bonds, whichface the headwind of rising long-term interest rates. Risinglong rates will ultimately pose a headwind for equities, butin the near term, powerful earnings growth will mitigate thedamage, in our view.Managers: Bill Miller, Mary Chris GayThe outlook for corporate earnings continues to be robustas well. Fourth quarter 2009 results are in and 72% ofcompanies beat consensus expectations, according to theWall Street Journal. The outlook for the first quarter of 2010is for more of the same. The ratio of negative to positiveearnings pre-announcements, which typically averages about2-to-1, is only running 1.3-to-1 for the first quarter. Firms inthe S&P 500 are expected to report year-over-year earningsPAGE 47 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010