Wednesday, June 27, 2012

BofA Merrill economists predict slow recovery, stronger stocks

A full economic recovery remains a long way off -- but that might actually help some investors, Bank of America Corp. economists said during a news conference today.

That's because investor sentiment has fallen so low that stocks might surprise on the upside, said Savita Subramanian, Bank of America Merrill Lynch's head of U.S. equity and quantitative strategy.

She said the markets have been responding more to macro trends and breaking news than actual company performance. Investors looking to navigate that tricky environment should focus on higher-quality stocks and yield-oriented investments, which tend to outperform the broader markets, she said.

Risky stocks have been trading at significant premiums to safe stocks for years, Subramanian said. But going forward, that trend will "basically run out of gas," she said.

Overall, the BofA Merrill economists took a cautious view on the rest of 2012, citing continued turmoil overseas, political uncertainty in the U.S. and a still-struggling housing market.

Senior U.S. economist Michelle Meyer predicted GDP growth of 1.3 percent in the third quarter and 1 percent in the fourth, below consensus estimates. Among the reasons: Housing isn't driving the recovery the way it did after past recessions; uncertainty about economic policy is forcing business owners to hold off on hiring; and continued trouble in Europe is affecting the global economy.

In one promising sign, the housing market is improving, Meyer said. Yet while housing starts will likely gradually increase, the overall level remains at historic lows. And while home prices have hit bottom, "we think bottoming is very different than starting a sustained recovery," she said.

The housing market isn't likely to really turn around until 2014 or 2015, Meyer said.