Corporate fundamentals remain very sound—balance sheets are healthy, and valuations are not demanding. The U.S. economy is not without risk, but it is growing modestly with the ever important housing industry in the early stages of what we think is a multi-year upswing. Bonds remain expensive, and investors are showing little concern for the potential loss of purchasing power. Cash is abundant both on corporate balance sheets and in money market funds. In sum, there is plenty of fuel for a lasting rally.
The upshot is that we remain cautiously optimistic about stocks, especially for the long term. The road ahead will no doubt continue to be challenging and even difficult at times—our fiscal condition clearly requires leadership from both political parties that must be more mature and flexible than what has been demonstrated over last two years. However, we expect a more historically normal pattern of growth ahead for both the U.S. economy and equities as we continue our recovery from the most significant economic crisis since the Great Depression.