Lord Abbett

Not only are U.S. employment costs accelerating but also worker output per hour is decelerating. Could this spur inflation concerns at the U.S. Federal Reserve?

The nuclear deal with Iran is not yet settled, but it definitely points to, among many other things, lower oil prices. Once sanctions lift, Iran, desperate for cash, will sell all the oil it can, increasing global supplies and likely driving down prices. This one-time supply surge will, no doubt, take a while to have its full effect, until mid-2016 in all likelihood, but thereafter, slowdowns in production elsewhere in the world, including shale and tar sands in North America, should again begin to put upward pressure on the global price of crude.

A Federal Reserve research report recommends deploying current policy for future crises. Is that really such a good idea?

A stronger U.S. currency likely will continue to weigh on exports and boost imports. What does this mean for future U.S. growth?

The prudent household deleveraging may keep the overall pace of economic growth slower, but it nonetheless has many favorable implications for the future.

The Chinese economy likely will sustain a pace of growth strong enough to stabilize stock prices.

Even with an expected rise in interest rates, the sector should see a faster pace of growth—not enough, however, to give a major boost to the overall economy.

While we await the disposition of Greece’s latest fiscal rescue, here are the issues that could influence the nation’s future—bailout or no.

After the volatility of the past few years, conditions once again appear favorable for this asset class.

It seems Greece has chosen default and capital controls. Even so, Athens can still cut a deal that would relieve both. Either way, it will remain unclear for a while whether the country stays in the common currency. In some respects, this situation is entirely manageable. That fact has fostered a dangerous complacency, for in other respects, this situation carries considerable risk—for the eurozone, for European finance in general, and for global finance.

Even amid a multiyear market advance, retail equity investors remain cautious. Here’s why that could actually help extend the rally.

Since the equity rally of the past few years has brought most stock indexes to new highs, investors increasingly have expressed skepticism about the possibility of future gains. It is an understandable concern—but it also is misplaced. Stocks still carry attractive valuations, if not as attractive as in past years, and so have ample ability to continue to rise, even if, as expected, the economy only lumbers along the shallow recovery path it has traveled to date.

The Great Recession of 2008–09 seems to have fundamentally changed the American consumer. For at least 30 years prior to that economic and financial upheaval, households in this country could only be described as financially aggressive. They spent freely, accrued debt at a rapid pace, and relegated savings to the status of an afterthought. In so doing, they helped propel rapid overall economic growth.

Data signaling nascent U.S. wage inflation could figure into the timing of interest-rate hikes by the U.S. Federal Reserve, even if growth in the broader economy remains slow.

The current pace of expenditures on property, plant, and equipment dampens the likelihood of an accelerated economic recovery.

Beijing likely will find a way to mitigate the effects of a slowing economy and soaring debt levels—but the risks are high.

A flat first quarter likely will be followed by one or two quarters of accelerated growth. Then it’s back to the muddle.

Market movements caused by the sharp drop—and subsequent recovery—in oil prices provide insight on successfully navigating the high-yield market.

Talk of an unsustainable surge in mergers and acquisitions is premature. The current level of activity suggests that corporate managers will continue to buy rather than build.

A compromise budget from the House and Senate will not affect U.S. revenues and spending—but it may help Republicans frame key policy debates ahead of the 2016 election.

The percentage of Americans either working or looking for work is lower than pre-recession levels. Here’s what it could mean for the economy—and Fed policy.

Even with the recent improvement, the pace of U.S. employment growth still lags earlier labor-market rebounds by a significant margin. What needs to be done to speed up the pace?

Worries that the elevated value of the greenback will crimp U.S. exports—and hurt corporate profits—are overstated.

Until the prime minister draws the "third arrow"—structural reform—from his quiver, Japan's economic and investment prospects will remain limited.

No redistribution here: Even as equity fund flows have turned positive, bond funds continue to see inflows. Here’s a closer look at the trend—and what it means for investors.

While the Tsipras government has bought itself some time, the possibility of a Greek exit from the eurozone remains quite real—as does the risk to global financial markets.

Here’s a look at key indicators—and what they signal for the pace of U.S. economic activity.

Could widespread defaults on the $1.2 trillion in U.S. student debt cripple the economy? Not likely.

Switzerland’s decision to scrap the franc-euro peg has grabbed the headlines, but the bigger story remains the continued dominance of the U.S. dollar.

The latest proposals from the White House all but ensure that no progress will be made on sorely needed tax-code fixes in 2015.

The answer to that question depends on three key factors. Here?s a closer look at each.

At best, the black sheep of the eurozone family is a troubling source of uncertainty for policymakers and global markets?at worst, it?s a potential disaster.

The Federal Reserve and the European Central Bank face significant limitations on what they can do to solve economic problems.

While much work still needs to be done, the financial condition of state and local governments in the United States continues to improve. What does this mean for investors?

Despite an improving labor market and lower oil prices, consumer outlays should continue to expand at a slow pace. Heres why.

Market prospects in the coming year would seem to hinge on four major considerations. One is geopolitics, inherently unpredictable but potentially disruptive, especially these days. Another is the Federal Reserves plan to raise interest rates along a gentle path beginning sometime in the middle of the year. Third is the perennial question of where value lies within and between markets. Fourth is the state of the U.S. economy.

Federal Reserve rate hikes or not, the fundamentals suggest the sectors slow, steady recovery likely will continue.

Mutual-fund data show that retail investors remain reluctant to commit money to equities. That actually could help extend the rally in the months ahead.

Amid the big changes in the U.S. capital, here are the potential legislative actions that could influence financial markets.

Ignore the pessimists. Declining petroleum prices likely will give an overall boost to the U.S. economy.

With the pivotal 2014 midterm election around the corner, here is the first of a two-part look at both sides of the U.S. budget. First up: Examining where U.S. taxpayers money actually goesand whether current spending trends are sustainable.

Just because two people are the same age does not mean that they have the same investment needs or risk tolerances.

The specter of falling prices in the eurozone is making the ECB chiefs job even harder.

The specter of falling prices in the eurozone is making the ECB chiefs job even harder.

Here's a look at what happened to equities during past periods when the Fed raised rates.

A report from the Congressional Budget Office forecasts shrinking deficits through 2015. After that, fiscal strains begin to emerge.

The fiscal health of state and local governments appears robust when compared with that of the federal government.

Chances for passage of the congressman's overhaul of the U.S. tax code are slim, but provisions of the bill could point the way to future reform.

Bearish market observers fret that earnings growth will falter and that current equity valuations are unsustainable. Their worries are misplaced.

It just might be. Data suggest that the central bank?s massive liquidity boost may be starting to flow into the broader economy.

"Animal spirits" remain caged as business spending lags. What will it take to unleash them?

The central bank's decision to taper, despite its earlier caution on the economy, has puzzled many observers. New research from the Fed's own staff may provide some clues to its current mindset.

Amid optimistic projections of an acceleration in growth, the factors that have restrained GDP remain firmly in place.

In reducing quantitative easing, the Federal Reserve chairwoman faces a big challenge: preventing asset bubbles at home without pressuring developing economies.

Goods and services sourced from overseas could help the United States alleviate the effects of future labor shortages - if lawmakers can resist protectionist impulses.

The electronic currency has attracted attention from speculators and financial media, but its unlikely to upend the existing monetary order.

After the budget deal, markets will have to contend with two wild cards in Congress: the debt ceiling and tax reform.

Demographic trends point to an expanding population of retirees and a relative shortage of working-age people. Heres how the U.S. economy can adapt.

A smaller U.S. budget shortfall for fiscal 2013 will be largely due to transitory factors.

In the first of a series on population trends that will shape the U.S. economy, Milton Ezrati looks at the policy challenges posed by an aging America.

Despite fiscal strains and political controversy, the common currency still enjoys broad support among member nations. Heres why.

Some observers believe medical cost increases have begun to abate amid the onset of the Affordable Care Act. The evidence isnt there yet.

State and local government revenues have finally started growing again. The resultant boost to spending and hiring should aid the economy.

A brief government shutdown would likely have only a modest impact on markets and the economy, and may even create buying opportunities in risk assets. A longer-term stalemate could be a far different story.

Will the upcoming congressional debate on interim financing and raising the debt limit lead to a government shutdownand market turmoil? Not likely.

The prognosis is by no means clear. Ambiguity surrounding the implementation of the Affordable Care Act will create further uncertainty for the economy in the years ahead.

Rising business outlays on equipment and technology will likely contribute to a subpar pace of hiringand help boost corporate profit margins.

The Japanese seem willing to give Abe room to reform when he decides to act.

Corporate profits arent exactly setting the world on fire, but the rate of growth should be sufficient to support further equity market gains.

U.S. consumer spending is likely to remain on a slow, but steady, growth trajectory, boosting overall economic growth.

The eurozones weaker members continue to falter, but the currency union will likely hang together. Make no mistake, though: Europe remains at the edge of crisis.

The Federal Reserve recently released first quarter data on household finances. These show continued and welcome improvement. Stronger balance sheets reflect improved real estate prices, rising stock prices, and continued higher rates of household saving.

June was a rough month for Chinas economy and its financial markets. Old concerns about sustainable growth came to the fore, as reports surfaced and resurfaced, recounting liquidity shortages, misdirected and excessive credit growth, gyrating interest rates, and signs of weakness in manufacturing. Commentators and analysts alike voiced fears of a Chinese collapse on a par with Americas subprime crisis. For the second time in as many years, several in the global financial community have prophesized a hard landing for Chinas economy.

Recent budget reports have been encouraging. Revenues are rising faster than originally expected, and deficits are running lower. Some of this improvement is real, but, sadly, not all of it.

While the recent gathering of the Group of 8 industrialized nations addressed worthy topics such as Syria and tax avoidance, it failed to tackle essential economic and fiscal issues.

This is the third in a series on longer-term market influences. Each has considered what developments could help or hurt the equity rally after some 1824 months, when, in all likelihood, stocks will fully realize their still attractive existing valuations and feel the last effects of the ongoing flood of liquidity provided by the Federal Reserve. The first number in this series took up monetary policy and the second fiscal reform. This last discussion looks at the prospect of energy abundance, due to fracking, among other sources.

This is the second in a three-part series on longer-term issues that could either sustain or stall the current equity rally once stock prices fully capture their current, still-attractive values. The first in this series took up the prospective policy change by the Federal Reserve. This discussion considers future fiscal developments.

A recent analysis in this space made the case for equities. Pointing to the continued flood of liquidity from the Federal Reserve and still-attractive stock valuations, I argued that the rally would continue, despite the subpar economic recovery and continued policy muddles in Washington and Europe. In this column, I will take up one of those fundamental, longer-term considerations: Fed policy. The columns that follow will discuss two other major issues: fiscal policy and energy.

Now that housing has at last begun to make a contribution to the economic recovery, the pace of capital spending seems to have ebbed. To some extent, the slowed pace of such spending reasonably reflects the economys still-more-than-ample production capacity. Reasonable as this seems, the slowdown does come as a disappointing change from the unusually strong growth earlier in the recovery. Now, looking forward, the prospect is for this slowed growth to continue, for a while at least.

Conditions appear favorable for the next 12 to 24 months. What could change the markets prospects in the longer term? Heres a look.

The Japanese patient seems to be responding well to Prime Minister Shinzo Abes attentions. Equities have rallied strongly. The yen, as the government desires, has retreated from export-crushing highs. The economy has shown signs of a genuine cyclical pickup. The good news has buoyed spirits in Japan. It will likely continue for a while longer, too. But the picture for the country is not yet all joy, because Abes policies fail to address the countrys significant, longer-term, fundamental problems.

Recession-wracked governments in the eurozone are rethinking fiscal constraints.

Americans have cut debt, boosted savings, and held spending in checkall of which should aid the economy.

International equities provide broader opportunities for combining appealing divided yields and earnings growth.

Will the U.S. dollar, almighty no longer, be supplanted as the worlds reserve currency? Not anytime soon.

The sectors comeback will continue, but the pace will likely moderate. Heres why.

An anxious German electorate may make it harder for the chancellor to continue her pro-cooperation approach to Europes fiscal crisis.

The mortgage finance giants are the subject of a new policy initiativewith significant implications for the U.S. housing market.

After several late-night meetings and considerable angst, the members of the eurozone have settled on something for Cyprus that looks very much like a typical bankruptcy. It is comical in a way that people worked so hard to arrive at an already widely known, well-established process. Still, this result may have value. Because Europe through these four years of crisis has strived to tailor settlements for each new challenge, it has always left people in doubt about each outcome, particularly where the pain would fall.

Believe it or not, prospects for better fiscal developments out of Washington appear positive. Heres why.

For oil and gas, an era of abundant supplies and lower prices awaits. But investors will have to weather a tricky geopolitical situation before it arrives.

Four decades ago, a currency war and significant Fed easing were followed by a bout of high inflation. Now investors are worried that history could repeat itself.

Results of the recent election increase the likelihood of a eurozone breakupand disruptions to financial markets.

In this conflict, the collateral damage could include asset bubbles and accelerating inflation.

Among the many fears shared by investors, concerns over fiscal drag have recently risen. Though no one yet can know the specifics of Washington's coming compromises, these will no doubt impose the anticipated tax hikes or spending cuts, and these will indeed hold back the pace of economic growth. Still, it would be a mistake to anticipate too much of a shock. The country, after all, has suffered fiscal drag for some years now. Even with failure in Washington, a moderation in cutbacks at the state and local level should allow government overall to offer the economy a measure of relief.

The country has renewed its conversation about the way it should tax itself, whether to rely on income taxes or replace them with sales taxes. This latest buzz springs from plans by several Republican governors to reduce or eliminate their state income taxes. It has extended to talk about change at the federal level, including speculation about the introduction of a value-added tax (VAT) in addition to existing federal income taxes. Similar proposals surfaced in the 1990s and earlier in this century.

If one sought an indication of how monetary policy and historically low interest rates can influence investor behavior, the high-yield bond market could provide some perspective. In 2012, investors' ongoing demand for income was reflected by the high-yield market's 15.6% return, the $32 billion that flowed into the asset class, andas several headlines pronouncedthe market's record-low yields of less than 6%.

Investors appear to believe the equity market will muddle through its many challenges.

The upcoming election may determine whether Italy continues its austerity and reform programs. The fate of the currency union may hang in the balance.

Yield spreads versus bonds indicate that stock valuations have considerable upside.

Yield spreads versus bonds indicate that stock valuations have considerable upside. Earlier in this recovery, when earnings were growing very strongly, consensus concerns about equities cited the danger of an earnings slowdown. Those expressing this concern pointed out, that such a slowdown would occur inevitably as the recovery matured, especially with economic growth proceeding at such a subpar rate. What seems to have escaped notice is that the slowdown already occurred in 2012 and that the stock market offered good returns despite it.

The returning prime minister is trying to spark the moribund economy with the same old remediesbut bolder action is needed.

The pace of stock repurchases says much about equity valuationsand companies' expectations for economic growth.

For the world's second largest economy, a hard landing scenario looks increasingly remote.

Whatever the outcome of the last-minute jockeying in Washington, meaningful fiscal reform remains unlikely.

Could it be that the U.S. trade balance is headed into the black? At first blush, the prospect looks dubious. This country's trade deficit has drifted deeper into the red for so many decades now that few can even conceive of lasting improvement. Even so, that is what seems to be in prospect.

Even if a "fiscal cliff" resolution is achieved, investors will receive another dose of uncertainty courtesy of the Affordable Care Act.

After the brinksmanship runs its course, Congress will jury-rig a fiscal compromise.

Once an area of considerable relative strength, business spending on capital goods has weakened of late. When the spending pickup began earlier in this recovery, utilization rates of existing facilities were so low that many expressed surprise. Only little of the spending went for increased capacity, of coursemost of it aimed at labor-saving equipment. But though this concentration held back the pace of hiring, it did contribute to economic growth. Now, however, it looks as though this surge has run its course, and the capital spending sector, too, has fallen into the slow slog.

Raising Keynes hasn't worked. What will finally lift the fog of uncertainty that bedevils the economy?

Probably not. Here's how a last-minute deal on spending cuts and tax hikes could work.

In an otherwise slow-growth economy, real estate investment trusts' (REITs) strong returns and yields have attracted considerable investment in recent years. Steve Benyik, Lord Abbett REIT analyst, provides perspective on the sector's key trends.

Of all the uncertainties facing investors over the past few years, the U.S. presidential election was among the most significant. And now that the election is over, asset managers are assessing the opportunities and riskssuch as the looming fiscal cliffwithin their respective markets. Indeed, the direction of fiscal policy remains investors' foremost concern, according to a recent survey of nearly 600 financial advisors conducted on Lord Abbett's postelection Web conference.

Media and the investment community have made much of recent good news on housing. Certainly, the recent upturn in sales, building, and real estate prices is welcome. But if the 1980's housing bust is any guide, popular references to strength and imminent recovery grossly overstate. That older experience suggests that health in the sector will return only slowly. Residential real estate may well have turned a corner, but major gains and price recovery will likely wait for some time.

The old saw for the last 80-plus years puts Brazil perpetually on the verge of becoming the next economic powerhouse, but never quite making it. It is easy to see the potential. The nation is large; rich in natural resources and arable land; has a sizable, active population; and has well-developed trade relations in the Americas, with Europe, and with Africa. Brazil has failed to realize its potential less for economic reasons than because of misguided government policies.

As long-term performance measures may improve, investor attitudes toward stocks may brighten.

The fiscal cliff looms large. It should. Unless Washington does something, the 2013 budget will face a sudden and automatic fiscal restraint. The shock would almost certainly drive this economy's already enfeebled recovery into recession. It is an alarming prospect, to be sure, but still, likelihoods suggest that even this partisan Congress will steer clear of such a "cliff."

The broad scope and open-ended nature of the Federal Reserve's third round of quantitative easing raises questions about what exactly Fed chairman Ben Bernanke has in mind. Some insight, remarkably, emerges from a speech he gave in November 2002 to the National Economists Club in Washington, D.C., when he was simply a Fed board member. Taking his cue then from fears of a Japanese-style deflation, he laid out a path for monetary stimulus in an extreme situation, outlining nontraditional policy tools that have since become common.

The Continent sees the first stirrings of needed job-market reforms.

Bernanke acknowledged four potential pitfalls in policywith a fifth lurking in the shadows.

The improvement in the U.S. trade balance can be traced to the dollar's relative weakness and increasing domestic energy production.

Reaction to the recent climb in gasoline prices appears surprisingly muted, but a sustained rise could result in a significant drag on U.S. growth.

Despite a chorus of voices calling for Athens to exit the currency union, the potential consequences would likely be unpalatable for the rest of Europe.

After being down so long, it is finally looking up for the beleaguered sector. But the recovery still faces a number of obstacles.

State and local government finances remain precarious. The degree of trouble varies from place to place, of course, but generally it will take decades for states and cities to put their finances in anything like good order. It is, in fact, a good bet that no middle-aged person today will live to see such an event.

Will the Fed launch another round of quantitative easing? If so, when? Here are the factors that could influence the central bank's decision.

The flow of economic news is hardly encouraging. Jobs growth remains disappointing. Recent readings on consumer spending and business activity show weakness as well. If the picture of the housing market has improved a bit, it still hardly portrays strength. Talk of an imminent recessionary dip has become common, for the third time now in as many years. While some recent economic reports have been discouraging, underlying fundamentals do not point to a return to recession.

Japan has been here before, and the outcome was far from pleasant. Yet it seems the wheels are in motion. The country will double its national sales tax, from 5% to 10%. Justified as a way to help the country deal with its precarious fiscal situation, the move has raised serious concerns. This kind of a tax hike, applied for much the same reason, has been widely blamed for the country's destructive late-1990s' recession.

As Europe's paymaster, Berlin faces a tricky task: promoting austerity among economically stressed peripheral nations but not too much. In Europe's seemingly endless debt negotiations, Berlin would seem to hold all the cards. It is, after all, Europe's largest economy, its most powerful, and its most financially sound. But in reality, Berlins options are highly constrained and require a remarkably delicate policy balance.

The population of China bears seems to keep growing. This already large colony of doomsayers can point to any number of legitimate troubles facing China today, and they glibly do so, from slowing exports growth to an aging population, from real estate excesses to a moribund consumer sector. Bears think China is in for a "hard landing," but their pessimism is overdone. Here's why.

Pessimists take note: Despite lackluster jobs data, the consumer is in better shape than many think. Amid the country's diverse economic problems, it is easy to look at the dark side of everything. However much material there is on that unattractive side of the ledger, people should not lose sight of the positive developments. Especially where the American consumer is concerned, matters, if still far from universally robust, have improved markedly during the last four years.

The growth of exports at times has added as much as two percentage points to the overall pace of the economys expansion and is a major reason why American manufacturing has staged a comeback in recent years - a renaissance some have called it. But of late, with the dollar rising against both the euro and the yen, and with growth overseas slowing or, in Europes case, falling, questions have arisen about the sustainability of U.S. export strength.

Amid a rising dollar and sluggish global economies, exports should continue to bolster U.S. growth, although the pace will slow. Exports have remained one of the few consistent bright spots in this otherwise subpar economic recovery. The growth of exports at times has added as much as two percentage points to the overall pace of the economys expansion and is a major reason why American manufacturing has staged a comeback in recent yearsa renaissance some have called it.

Unlike the cinematic outlaws, Congress will likely avoid a year-end plunge into the chasm of economic peril. The CBO report identifies eight elements of this looming fiscal drag: five automatic tax hikes and three automatic spending cuts. It estimates their total impact for fiscal 2013 at $607 billion, or some 4.0% of the countrys gross domestic product (GDP), and enough to turn positive growth negative.

As of this writing, the Supreme Court has yet to announce its decision on Obamacare. It has not even announced when it will reveal its decision. Still, if much about the Courts conclusion remains a mystery, two things about it are fairly clear: 1) the Court will almost surely hand down something complex, and 2) whatever it decides, uncertainty will continue to plague business and investment decision making.

As the Europeans meet and speak and summit, it becomes ever clearer just how intense and complex matters have become. Greece will determine, later this month, whether it will stay in the eurozone or perhaps even the European Union (EU). In or out, Europe and Greece will have to cope with the aftermath of the decision. Even as Greek questions remain open, an even broader drama has grown around recent proposals for the union to issue eurozone bonds that would draw on the generalized credit of all members in common.

Japan still looks troubled. To be sure, the economy recorded a surprisingly strong 4.1% annualized real gross domestic product (GDP) growth in the first quarter. Much of that growth, though, was due to government spending. Otherwise, the flow of news still points to the same tepid growth that has troubled Japan for more than 20 years now. Four of the last six quarters have shown real declines, including last years fourth quarter. This once-powerful exporter faces a deficit on its balance of international payments, while spring data releases show industrial production in decline.

Despite the Washington divide, the prospects for tax reform are stronger than you might think. The budget debate in Washington goes on, highly partisan and seemingly with little prospect for compromise, much less progress. Even after Novembers election, probabilities suggest that neither party nor group of budget partisans will gain enough power to move fiscal matters in a concerted direction. Still, for all the prospect of impasse, tax reform remains a possibility.

The drama never ends. The past few weeks have seen another sudden change in the eurozones political-economic complexion. Four or five weeks ago, the Continent seemed to have established a fairly firm consensus for fiscal austerity. Since then, the government in the Netherlands has fallen over the austerity question, and elections in France, Greece, and elsewhere have all but quashed any such conviction. Street protests in Athens, Madrid, and elsewhere have also spoken to the breadth of anti-austerity sentiment. Are Europes current leaders up to the task of fiscal reform?

Since late 2011, measures of consumption show acceleration in virtually all categories. In one sense, this is good news for the economy, as it will push the pace of overall growth and, ultimately, prompt more hiring, which in itself will reinforce spending growth. But this new trend raises longer-term concerns. More liberal consumer spending can only take the economy so far. Because heightened levels of consumption will limit households abilities to make needed improvements in their finances, any effort to boost outlays too far too fast would only threaten pinched finances at a later date.

After two-plus years of exceeding expectations, earnings this year seem poised to reflect the plodding nature of this economic recovery. In 2010 and 2011, even as the real economy managed only a paltry 2.4% average annual rate of expansion, the earnings of S&P 500 companies soared, rising more than 47% in 2010 and almost 20% in 2011. This year, the slow fundamentals will surely assert themselves. There is nothing ominous in the pattern. It is, after all, well-established historically that earnings should come into line with slower-growing revenues in this, the third year of economic recovery.

Economic statistics seem at times to have their own ebb and flow, sometimes overstating and sometimes understating the underlying fundamentals. Sadly, these often meaningless data variations can create false feelings about economic possibilitiesenthusiasm, when the statistical flow leans toward the strong side, or despair, when it leans on the soft side. Investors, in particular, succumb to such swings in attitude, but, to a lesser extent, so do businesspeople. So, it was with a string of insupportably good numbers late in 2011 and earlier this year.

Among all the fears discussed in the financial community these days, worries over Chinas expansion loom large. The government in Beijing has revised down its growth expectations to 78% a year from the former breakneck pace of 1012%. Private groups, such as the American Chamber of Commerce in China, have made similar downward adjustments in their expectations. Though there is good reason to anticipate a slowdown in the pace of Chinese growth, it would be a mistake to exaggerate the risks, and especially to do so by drawing easy parallels to Americas real estate debacle.

Chinas central bank governor, Zhou Xiaochuan, made comments that drew less attention than they deserve. First, he suggested that market forces would play a bigger role in setting the value of Chinas currency, the yuan. He also mused that the yuan should rise further against the dollar and on foreign exchange markets generally. An announcement by the People's Bank of China relating to increased flexibility in the trading band of the currency would appear to confirm Zhou's intent. There is room for two responses to this new Chinese positioning, one cynical and the other much more positive.

The Federal Reserve, while continuing to hint at future quantitative easing (QE), seems at last to have also felt a need to address the longer-term inflationary risks of such policies. Accordingly, Fed chairman Ben Bernanke unveiled a new approach to quantitative easing, what he calls "sterilized QE." It, he claims, would both support markets (and the economy) and at the same time guard against any longer-term inflationary consequences. Though there is good reason to harbor skepticism about the technique he has outlined, this recent change in tone does offer encouragement.

One of the great constants in this otherwise inconstant environment is the strength of corporate finances. Financial excesses and the need to de-leverage concern governments and households, not the corporate sector, which actually came out of the 200809 financial crisis and recession with its finances in good order, and has only strengthened them since. The question now is how and when companies will deploy these impressive financial resourceswhether on capital spending, hiring, or, especially, on the mergers and acquisitions (M&A) that typically proceed from strong corporate finances.

The Fed recently released the results of its latest survey of senior bank officers. Like the economy, the bankers' attitudes were mixed. Things have improved over the past year. Bankers on balance have shown a greater willingness to extend credit. But still, they remain very cautious. Understandable after the losses of 200809, this lingering reluctance to lend offers yet another explanation as to why this economy's recovery has proceeded so slowly to date, and will likely continue to do so for some time to come. Still, there are tentative signs that the environment is easing.

The chairman has shown clearly that all policyboth fiscal and monetaryfaces quite a balancing act. The Fed, which has already done a great deal to support financial markets and the economic recovery, has reason already to worry over longer-term inflationary pressures. But it cannot remedy matters if the federal government fails to do its job of fiscal reform while protecting the economic recovery. Bernanke has made it clear that there are no easy answers, because all the pieces of the puzzleeconomic growth, inflation, monetary policy, and fiscal policydepend on each other.

Europes heads of state have done a lot of summiting and deal- making of late. Greece has voted for still more austerity. But on balance, the results have, again, disappointed. Though Europes monetary authorities have staved off Greek default, the more significant help for Europes sovereign debt troubles has come from the European Central Bank (ECB), which, at last, has begun to provide markets much needed liquidity. Otherwise, Europes leaders, though they have managed something, seem incapable of thinking broadly enough even to begin grappling with the continents underlying problems.

With the situation highly unstable the hope is that the powers involved can reach a resolution without resorting to military action or even a standoff that prompts insurers to close down shipping. Should such a resolution develop, crude oil and gasoline prices would certainly drop from today's highs. Though they would not likely recapture the lows of late last year. Even if today's level of tension were to hold up current prices indefinitely, it would cause little further harm than it already has. But until some resolution is reached, risks for much higher prices remain significant.

Republicans promptly condemned Obama's fiscal 2013 budget. Since Republicans control the House, there is little chance that this budget, will pass into law before November. But if this proposed budget is DOA leaving little reason for investors to adjust their portfolios for it, the document can instruct on what it ultimately will take to address this nations deficit and debt problems. Two matters in particular become clear: 1) overall spending control demands entitlements reform and 2) tax hikes on the wealthy, whatever they mean to fairness, cannot fully answer the deficit question.

President Barack Obama has released his fiscal 2013 budget. Republicans promptly condemned it as irresponsible and merely a campaign document. Since Republicans control the House of Representatives, there is little chance that this budget, or anything like it, will pass into law before the November elections. But if this proposed budget is dead on arrivalleaving little reason for investors to adjust their portfolios for itstill the document can instruct, especially on what it ultimately will take to address this nations deficit and debt problems.

Good news on residential real estate has prompted a kind of enthusiasm about the sector's prospects. It is good to see closure on the legal matters surrounding foreclosures and some improvement in sales and construction activity. These signs do suggest that the worst on housing has very likely passed. But too much enthusiasm is misplaced. Much will prevent housing from acting as an economic growth engine for years to come. The economy will grow, and the urgency surrounding home values and mortgages will gradually lift, but the sector at best can offer the economy little more than neutrality.

Europe seemingly creates new financial and economic concerns daily, while in the United States, fiscal questions and election uncertainties trouble the outlook. Still more dangerous issues surround the military and diplomatic maneuvering in the Persian Gulf. And these are just a sample of the sources of investment concern. But even as all this prompts people to hide in cash and the usual safe havens, such as U.S. Treasury bonds, these investment choices pay such poor yields that presumed safety comes at tremendous cost. Investors, then, must consider riskier investments.

Among those choices, credit-sensitive fixed-income instruments would seem to offer superior returns with reasonable security. Opportunities also present themselves in the equity markets. In the developed markets, North America seems to offer the best risk/reward balance. Though stock valuations are better in Europe and Japan, the former still needs to deal with its debt crisis and the likelihood of recession, while the latter faces the very fundamental matter of severely aging demographics as well as the immediate adverse impact of an expensive currency.

It is hardly an insight to note that markets today are beset with fears. What is less widely acknowledged and critical to investment strategy, however, is that the level of anxiety has driven market segments to different extremes of valuation. On the one side, widespread fear has driven up the prices of the usual safe havens, such as U.S. Treasury bonds, gold, even the debt of other presumably stronger governments. On the other, the anxiety has severely held back relative pricing on equities and credit-sensitive bonds. This divergence presents potentially remarkable investment opportunities.

Though a good deal of concern over European downgrades has emerged, markets actually have received reason to anticipate relief in Europes financial crisis. The old risks and fears remain, of course, but the ECB has at least changed the equation, signaling that it had jettisoned its former hands-off policy and begun, at last, to support European financial markets. The remarkable nature of the change received only a few headlines, and even less commentary, but it deserved then and deserves now more attention. The ECBs help is crucial.

The Federal Reserve recently announced plans to publicize its interest rate expectations. The new approach, according to the Fed, should give investors and businesses a more reliable basis on which to plan. The Fed argues further that people, acting on those plans, will enable monetary policy to have a prompter and more thorough impact on longer-term bond yields and on the overall economy. Reasonable as all this sounds, matters may not go quite as smoothly as the Fed seems to think. On the contrary, the new open approach could cause more harm and more confusion than the former secrecy did.

Though the most intense pressure from Europes financial crisis will likely abate in the coming year, its lagged effects seem poised to put the continent into recession. Even if in the next few months the governments of the EU and the leadership of the ECB act with more resolve than they did last year, any favorable economic effect will take time to develop, leaving Europes economies to suffer in the interim. The most optimistic forecasts on Europe expect negligible growth. More pessimistic forecasters look for a 23% drop in the continents real GDP.

Employment gains of late have taken the edge off peoples worst recessionary fears, but they nonetheless remain fundamentally inadequatefar short of historical norms and the very human needs of the now-huge army of unemployed. In the coming year, continued economic growth should improve the situation, but only marginally. Employment will increase only slowly. By the end of 2012, still more than 8% of the work force likely will remain unemployed.

The panic from the risk of default and the possible dismantling of the euro has gained the headlines and depressed most asset prices across the globe. The austerity measures, seemingly demanded by the situation and certainly by the EU and the ECB, have clearly set Europe on a recessionary path that threatens the pace of global growth. Europes problems have also distorted currency values across the world, creating problems in yet another way. These will linger even though the ECB seems to have overcome its former objections and has begun to provide the liquidity needed to quell market fears.

This column looks at how the household and business sectors have lightened their debt burdens and how delinquency rates have improved as a result. The record is plain. As the 2008 crisis broke, the American private sector moved dramatically to reduce its dependence on debt. From mid-2008 to the quarter just ended, the household sector cut its overall debt burden by a cumulative $689 billion or about 5%. Mortgage debt, naturally, fell the most, in part because of foreclosures, but also because households voluntarily reduced their exposure.

This past October, a group of four regulatory bodies jointly released draft proposals of the so-called Volcker Rule. Part of the Dodd-Frank financial reform legislation set to go into effect this coming July 2012, this rule would forbid banks any substantial interest in either hedge funds or private equity firms and also prohibit banks from doing any proprietary trading on their own account in securities of any kind. Apart from the legitimate concerns and arguments on both sides, the most threatening and dangerous aspect is the debilitating lack of clarity.

Since all the financial troubles began in 2008, the Fed has pumped massive amounts of liquidity into the economy: first to stem financial collapse, then to ameliorate the effects of the recession, and more recently to spur the all too sluggish recovery. For a long time, this liquidity remained bottled up in banks and other financial institutions, where it helped, but less than it otherwise might have. Now however liquidity seems to have begun to flow more generally, suggesting 1) that Fed policy is finally having its looked-for effect and 2) that in future, the economic climate will improve.

Amid all the risks today, and given the spotty history of stocks during the last 10 years or so, it is easy to understand why both retail and institutional investors continue to avoid the U.S. equity market. But understandable as their reluctance is, there are at least five good reasons to consider equities now: 1) There is good value. 2) There will be no double-dip recession. 3) Europe should survive. 4) Washington will not implode. 5) Nobody is buying equities.

So far in this painfully slow economic recovery, the government sector has made a mixed contribution to economic growth. State and local governments have cut back and have slowed the pace of the economys overall advance. Though federal spending has added to growth, it has followed an erratic pattern that has no doubt eroded confidence. Now, going forward, state and local spending, though still far from a contributor to growth, will have less and less of a restraining influence over time, while federal spending seems poised to turn from supporting economic growth to restraining it.

Markets have shown a mixed response to Europes agreement on sovereign debt. On the positive side, Germany, France, European banks, and other members of the eurozone have shown more direction, control, cooperation, and concerted action than previously, and in so doing, have taken a step to avoid panic and what could easily have become a global financial meltdown. But still, Europe and, consequently, the rest of the world remain far from out of the woods. This latest step is inadequate. To get a grip on the crisis, the ECB will need to add its financial resources.

There is a certain irony in this situation: Washington seems ready to start a trade war with China, while investors, for other reasons, worry over a crackup in this critical economy and crucial engine of global growth. And there is reason to worry about China. Inflationary pressures have grown, threatening to undermine that economys competitive edge, slow or stop the pace of economic growth, and jeopardize asset values. Chinas anti-inflation policies independently threaten economic growth prospects and also asset prices.

Now that the U.S. Senate has fired what might be the first salvo in a trade war with China, investors, already beset by a host of uncertainties, must consider anotherpossibly the most dangerous of all. If Congress can label China a currency manipulator, then tariffs aimed at China become likely, as does Chinese retaliation in a pattern that would hurt world trade, growth prospects in both countries, and asset values on both sides of the ocean and beyond. The Senates recent vote is still a ways from legislation, but the dangers here are so profound they demand a consideration.

In this horribly uncertain investment climate, one thing at least is clear: American equity markets have priced themselves for disaster. Stocks by almost any measure (except those carefully designed to make them look bad) do look cheap, especially relative to bonds. Such valuations, apart from what they say about sentiment, give markets upside potential even in the absence of full-fledged good news. All they need for a positive response is an abatement of the flow of bad news. And although it is possible that the stream of bad news will continue endlessly, it is not likely.

In this horribly uncertain investment climate, one thing at least is clear: American equity markets have priced themselves for disaster. Stocks by almost any measure (except those carefully designed to make them look bad) do look cheap, especially relative to bonds. Such valuations, apart from what they say about sentiment, give markets upside potential even in the absence of full-fledged good news. All they need for a positive response is an abatement of the flow of bad news. And although it is possible that the stream of bad news will continue endlessly, it is not likely.

The lesson here comes in two parts. First is the age-old rule to keep emotion out of investing. If even the best analysis can at times produce the wrong investment conclusions, emotion almost always yields the wrong conclusions. The second is to remember how plausible the worst-case picture looked at the timewrong as it wasand to use that perspective in assessing todays fears, not to dismiss them or ignore them but rather to broaden thinking about possibilities and probabilities, including prospects that, if they are not good, are not disasters, either.

Along with continuing concerns over the strength of the economic recovery and the fate of Europes sovereign debt market, investors also share abiding anxieties over the deliberations in Congresss Super Committee on deficit reduction. Of course, the group of 12 congressmen and senators will wait to report out their recommendations until late November. But rumors and leaks have already begun. Though there are no guarantees, these leaks can at least help investors prepare for what might actually make it into the final recommendations. Not all the indicators are disappointing, either.

It will take time before a return of confidence can move matters beyond the recent, tentative expressions. Cash and the lack of confidence it reflects remain high. But investors should, nonetheless, remain aware of the tremendous potential for dramatic expansion in corporate spending, hiring, and M&A activity from even a modest improvement in confidence. Especially since equity market valuations these days make it cheaper to buy than to build, the M&A potential, with its always immediate market impact, looks particularly powerful.

Of the three big issues dragging markets up and down these daysWashingtons ongoing budget uncertainties, the threat of a second recessionary dip, and Europes sovereign debt crisisthe latter is most dangerous. It not only carries a direct risk of wealth destruction but also of bank insolvency and, consequently, the prospect of a return to the liquidity shortages of 2008. Probabilities suggest that Europe will work its way through this mess, not without pain, of course, but more successfully than many now fear. Until it does so, however, risks remain.

Those who had succumbed to double-dip recessionary fears got a shock with the July report on household incomes and outlays. It showed continued, albeit moderate, income growth of 0.3% for the month, but a striking 0.8% jump in outlays. Though far from conclusive, this spending jump, among other indicators, offers considerable evidence that the economic softness that was supposed to be a prelude to recession was more likely an interruption from which the economy will now likely move ahead, however slowly.

Three issues have dragged the market around of late: 1) Europes sovereign debt crisis, 2) Washingtons budget debate, and 3) fears that the American economy will fall into a second recessionary dip. This Economic Insights takes up the third of these pressing issues, offering a kind of scorecard on double-dip likelihoods by peering behind the latest, admittedly weak, economic data to assess causes and likelihoods. The conclusion admits to the possibility of a second recessionary dip, but nonetheless settles on the probability that growth will continueslow to be sure, but growth nonetheless.

Amid the many signs of economic weakness, the recent rise in bank lending stands as a welcome contrary indicator. Policy makers at the Fed no doubt see the news as significant. Certainly, a willingness among banks to lend actively to companies and to individuals does much to build confidence that the economic expansion can continue. Bernanke has on many occasions identified bank lending as a crucial sign that past stimulative policy has gained traction. Growth in bank loans should give the Fed comfort about its past efforts to exercise patience with a QE3.

Fears about emerging market investments have grown of late. Todays doubts have three sources. 1) Many once popular emerging equity markets have failed to keep up with their impressive past gains. 2) The emerging economies look more vulnerable than previously to the ills of inflation and the associated slowdown in the pace of growth. 3) Valuations look much less compelling than they once did. But if all these factors keep emerging markets from repeating the phenomenal gains of the last 1020 years, investors would make a mistake to dismiss them out of hand.

Back in 2009, when the recovery from the subprime crisis was just beginning, the International Monetary Fund produced a remarkable study of past economic cycles. The analysts there made a point of distinguishing the behavior of cycles caused by financial crises from the behavior of cycles with other causes. Their work made clear that recessions associated with financial crises were deeper and lasted longer than others and that the subsequent recoveries were slower. And that when cyclical forces were synchronized across the globe, as they were in 0809, these differences were even greater.

The American consumer is not nearly as vulnerable as during the 200809 recession. During the past two years, American households have so restrained spending, absolutely and relative to income, that presently they maintain about a $590 billion annualized savings flow, up strikingly from the $190 billion annualized flow averaged in the middle of 2007. Since this current savings flow amounts to some 5% of outstanding household liabilities, households need make no further cutbacks to improve their balance sheets, leaving them to spend marginally more freely.

Amid signs of economic weakness elsewhere, Americas export sector seems to go from strength to strength. After decades during which observers consistently bemoaned the countrys global failings, it is hard for many to accept this turn. But the numbers do not lie. Exports have helped propel growth for some time now. Of course, at only about 13.5% of the overall economy, even robust exports growth can push up the economys overall pace only so much, but it can offset the huge drags elsewhere in the economy, such as in state and local spending, which constitutes about 12% of the nations GDP.

With recession fears again gripping financial markets, it pays to take another look at the American consumer. At more than 70% of the economy, he and she will determine the direction and the pace of the economy. And despite the current gloom abroad, the picture that emerges from this examination, though far from robust, carries the expectation of continued, if slow expansion, especially since consumer spending has good income support. Though many other economic measures have weakened of late and depressed the view of economic prospects, the consumer has shown remarkable consistency.

Despite the sudden return of double-dip recessionary fears, the U.S. economy should keep growing. The growth, slow as it will likely be, is critical to a continued equity market advance. But still, the recovery is maturing, and the pace of earnings growth should slow. To be sure, the high operating leverage of American firms will allow them to turn in double-digit earnings advances even in a slow-growth environment. But the growth pace should come in much slower than last year. The change will likely move the marginal investment advantage from value to growth stocks.

For all the pain suffered by the Japanese as a result of the earthquake, the disaster and its ripple effects, offer them at least some smugness. The world, obsessed new, had for years dismissed Japan as a part of the past, preferring instead to enthuse over China and emerging economies. This horrible disaster has made one thing very clear: Japan still plays a critical role in the global supply chain and economy generally. How soon, if ever, will Japan recover its former productive role? And how will the shock of the recent disaster change the Japanese economy?s long-term direction?

A robust recovery was never in the cards?as Lord Abbett has continually pointed out?even during the consensus? optimism earlier this year. But a second recessionary dip is highly unlikely. Instead, the American economy should carry on with middling growth of 2.5?3% in real terms, propelled by exports, moderate consumer spending growth, and continued, cautious advances in corporate spending, while sideways moment in housing and absolute declines in state and local government spending hold the pace back from what it might otherwise achieve.

Oil prices spiked up more than 40% between September 2010 and early May, before suddenly giving back half the gain within the space of a week. Analysts naturally sought to explain the wild price swings with supply and demand. But, as is so often the case with commodities the fundamentals mean less than speculative money flows. These explain both the run up and the retreat and why prices moved so far so fast. Speculative motivations, more than the fundamentals, will set future price movements, though the fundamentals, when they influence, should keep the direction pointing down more than up.

The government seems set to hit the dreaded debt ceiling in stages instead of all at once. The first touch came on May 16. But because the Treasury can redeploy funds, it can delay any practical constraints from the limit until early August. While Washington and the media show considerable anxiety, investors seem to expect that the event will have no practical effect in the end. Of greater significance to investors are the policy positions that swirl around to debt ceiling debate, especially since by August, Washington will need to argue both the ceiling and the 2012 budget at the same time.

Housing remains a focus of uncertainty and anxiety. Its collapse largely created the 2008 financial crisis and recession. Housing concerns formed the basis of last year?s ?double-dip? recession scare. Many fear that further problems in the area could thwart the present economic recovery. Of particular concern now is the still large overhang of vacant, unsold properties and the even larger overhang of properties on which lenders have delayed foreclosure, the so-called ?shadow inventory.? The inventory situation will hold back real estate prices and building activity for a long time to come.

Fed has indicated its intention to let QE2 end as scheduled in June. This decision would mark the first designated step in the cautious program for policy change that Bernanke had previously outlined. If the Fed sticks with this plan it will take until early 2012 before policy makers will begin to increase market interest rates. Even at that last step, policy would remain easy as the Fed makes its gradual moves. The only difference is that the easing will gradually become less extreme. It will likely take until late 2012 or 2013 before American monetary policy even approaches restraint.

The fiscal debate has dramatically changed character and emphasis in just the past few months. Whereas last January President Obama only hinted at tax reform and spending cuts, they now have taken over the fiscal agenda. True, Republicans and the president remain far apart, and Washington is nowhere near a grand compromise, but it now looks as though the parties could agree on some bits and pieces, significant enough for markets to begin, but only just begin, to gain some confidence in progress on the deficit issue. The fiscal goal posts have moved.

Any serious discussion of inflation today must separate short- from longer-term prospects. For the short run, the risks of a generalized inflation remain small, recent increases in commodity prices notwithstanding. For the longer run, the risks rise. Perhaps recent commodity price hikes anticipate this longer-term potential, though there are other explanations. But whatever the specifics, the fundamental risks lie almost entirely with policy in Washington, that is, how the Fed treats the excess liquidity in markets today and how the federal government deals with its huge budget deficits.

Concern about inflation these days seems to travel along two separate avenues. On the more technical side are the worries over recent food and fuel price spikes and the objections to Washington?s practice of excluding such price moves from its analyses and policy decisions. The second, very different concern takes a much longer-term view and worries that federal budget deficits and the liquidity poured on markets during the past two years or so by the Federal Reserve will cause considerable inflationary pressure in 2012 and beyond.

Now that the debate on the 2011 budget has largely run its course without the much-feared government shutdown, the more serious and substantive debate on the 2012 budget has begun. Though less suspenseful than the issues of 2011, the 2012 budget debate will determine basic fiscal directions in the United States for years to come. The Republicans recently offered their counter to the budget that the president unveiled some weeks ago. Having already examined the White House proposals, this third in Lord Abbett?s occasional series on fiscal issues takes up the Republican plans.

The jobs market has begun to improve. True, the pace is much too gradual for many, but still there can be no mistake that business has at last started rehiring. Not only have payrolls increased but also other indicators foretell further fulltime hiring. What is more, the unfolding jobs recovery, despite people?s understandable impatience, seems pretty much on track with past cycles. Prospects for any continued improvement, then, should give Washington cover to cease its largely singular focus on jobs and deal with longer-term issues. Recent signs are fairly consistently positive.

The budget debate goes on, scrapping over the still-unfinished 2011 budget and, more importantly, positioning for the more fundamental issues of the 2012 budget. President Obama has already issued his budget for 2012 and the years beyond. These are exciting times for Washington?s policy wonks. For investors, these matters are important, if sometimes mind-numbing. Related to these larger deficit issues, but also separate from them, are the newly raised questions of corporate tax reform. These will form the subject of this second in Lord Abbett?s occasional series on fiscal matters.

American households have used the economic recovery to improve their finances. However, They have a long way to go before their balance sheets resemble financial health. Though just about every relevant financial ratio has improved, household finances remain far from the comparatively sound state that prevailed in the mid-1990s. And since households remain sensitive to their situation, they should continue to hold back on spending and save at higher rates going forward. If spending rises, as expected, more or less in tandem with income, the consumer will offer the economy a slow growth engine

As lenders, managing their foreclosure opportunities, gradually feed the ?shadow inventory? of homes onto the market, the flow of properties will no doubt keep a lid on real estate pricing and on construction activity for some time to come, particularly in the most hard-hit regions of the country. Still, if circumstances keep housing from offering the economy a growth engine for a long time to come or the source of wealth creation in the household sector, the economy and financial markets will nonetheless welcome the change from the sharp declines and volatility of past years.

This piece takes up President Obama?s 2012 budget. This budget does project shrinking deficits, but offers little in the way of policy that might achieve the more fundamental goal of fiscal prudence. It includes revenue enhancers, the expiration of the Bush tax rates, now scheduled for 2012. It also looks for substantial additional revenues from corporate taxes. It proposes spending cuts in civilian discretionary programs and in defense. Apart from these, the administration forecasts deficit improvement on the basis of economic growth that, would raise revenues faster than spending.

No one pretends to know what the immediate future holds, not even Japan?s nuclear engineers. Fear that has caused a general sell-off in markets. The huge uncertainty has raised risk premiums and sent investors for a time in the direction of safe havens, such as government bonds though Europe's particular problems compound the uncertainty about European sovereigns in this regard. The weight of uncertainty has fallen hardest on stocks connected to the nuclear industry. There is a need for investors to look beyond the immediate emergency to at least seven basic points:

The turmoil in the Middle East goes on, and, though oil has continued to flow uninterrupted, understandable uncertainties have bid up crude and gasoline prices anyway. A barrel of crude now costs considerably more than straightforward supply/demand fundamentals would imply. And as long as the uncertainty persists, prices will almost certainly stay high. Despite this, three aspects of the situation seem more definite. First, fuel cost pressures may slow, but they are unlikely to stop the American and global economic recovery.

Though each scare story on municipal bonds has a kernel of truth in it, the trend of late has become hyperbolic, sparked to no small degree by an exciting, popular, but evidently poorly researched television news show. To be sure, state and local finances are a mess. It will take decades of remedial effort to bring them anywhere near what people might characterize as sound. But especially since pricing now seems to anticipate calamity, the prospects for these securities hang less on good than on improving finances, and on that score, the outlook is favorable.

The U.S. Treasury has released the most remarkable proposals on the future of Fannie Mae and Freddie Mac. After actively supporting these government-sponsored enterprises, the administration has effectively recommended that they cease to exist. More than that, the proposals would reduce long-standing government support for broad-based home ownership and look to alter financial arrangements to offer greater support to the rental market. In just these outlines, it is clear that the current administration would reverse Washington?s long-standing approach to the housing market and home ownership.

Within equity portfolios, there certainly is good reason to lean toward larger capitalization issues. Standard cyclical timing would point toward larger capitalization issues anyway, and small capitalization stocks, having led in the rally by a wide margin so far, now carry less favorable valuations than they once did. What is more, when retail investors at last return to the equity market, they will likely favor larger, better-known names. Still, in taking advantage of these circumstances, it would be a mistake to abandon small cap issues altogether.

The positive outlook for equities draws on many sources, but basically rests on two pillars: 1) continued economic growth that will sustain an earnings expansion and 2) still-favorable valuations prevail, despite the great rally since March 2009. Neither point, of course, is beyond complaint. Nothing in any investment outlook is absolutely secure. Now, as ever, prospects are overshadowed by a cloud of risks. But the likelihoods still favor the earnings growth and a favorable response from equity markets.

Clearly if Europe?s sovereign debt problems careen out of control, a global flight to quality would likely reoccur, bringing U.S. Treasury and agency yields back down. But if as expected the European Union (EU) manages the situation, then the recent unwinding of the former flight to quality should continue, rendering Treasuries and agencies problematic investments at best, and leaving the only fixed-income opportunities in credit-sensitive investments.

This is the first of a four-article series on the macro considerations behind Lord Abbett?s fixed-income and equity outlooks. This first installment offers an overview. The three pieces that follow will, in turn, take up the reasons behind 1) the general preference for credit-sensitive fixed-income issues; 2) the positive overall stance on equities; and 3) the call for a thorough capitalization mix within equities.

The Federal Reserve?s recent recommitment to a second round of quantitative easing (aka QE2) has come at a time when past efforts at monetary stimulus seem at last to have gained traction. Accelerations in various measures of money supply suggest that the economy is finally drawing on the copious amounts of liquidity the Fed previously injected into it even before the most recent round of quantitative easing.

There is little question China is suffering a real estate bubble. Property prices have risen rapidly, encouraging more speculation in development, which in turn has propelled prices up farther. The boom has already brought land prices to 60% above their pre-2008 peaks. Prices have so far outstripped the population?s ability to buy. The price of a home is 10 times the median household income. In Beijing, housing prices on average are 22 times the average annual income of city residents. In contrast, in the US, home prices at the peak of its bubble stood at 6.4 times median household income.

Capital spending seems set to broaden this year. Business so far in this recovery has aimed its spending only at improving efficiency (not expanding capacity) and finding ways to substitute technology and software for workers. Though not unusual in the early stages of cyclical recoveries, the intensity of the focus during the past year has been remarkable. Now, however, some of the cause of the extreme emphasis on labor-saving equipment has begun to shift, at least at the margin, leaving reason to look in 2011 for a broader, if more moderate, growth in capital spending.

For all the complexities and undeniable risks, the outlook is reasonably upbeat. Continued, if slow, economic growth will raise earnings and, in time, gradually will begin to improve the labor market. Inflation, though a longer-term risk, will remain well contained in the coming year. Questions about monetary and fiscal policy will continue to hang over the economy and the markets, but circumstances nonetheless seem set to generate further advances. If, at the end of the year, few would declare themselves as rich and secure as they once felt, they still will have experienced improvement.

Treasury bonds recently have made an impressive and, to some, frightening move?a sudden reversal of the long flight to quality that previously had so bid up Treasury prices and reduced the yields to ridiculous lows. Many explain this sudden reversal in terms of Washington?s recent decision to extend the Bush-era tax cuts for another two years. Certainly, there is reason to make such a link, but there is more going on than just this compromise, enough to keep the trend in place for some time to come. Here are four references on what lies behind this reversal.

With an Irish rescue seemingly in place, Europe must now look to Portugal, Spain, and Belgium. The continent?s sovereign debt crisis threatens the euro?and the EU itself. We can make some tentative conclusions: 1) Europe?s existing rescue resources are more than ample for Greece, Ireland, and Portugal. 2) The great danger lies with Spain, less because of government profligacy and more because of the potential fallout from that country?s collapsed real estate bubble. 3) The EU has shown determination to deal with the problem and protect the euro and the union.

Like the Southern belle of romance, American households have begun to revive from their former swoon. Reestablished savings flows have, during the past year or so, begun to pay down the debt-overhang built up in previous years. Households still have a long way to go before they can return their finances to the sound state they enjoyed in, say, the mid-1990s, but matters have improved enough to support a modest expansion in spending and enough to support a continued, if slow, overall economic recovery.

Trade tensions seem to intensify daily, especially between the United States and China. Congress not too long ago upped the ante, labeling China a "currency manipulator." both the United States and China could get around immediate passions and politicking and find a basis for accommodation in their common, longer-term goals. In this regard, it is at least modestly encouraging that the International Monetary Fund (IMF) has become involved in the China?U.S. currency dispute.

Because the fears forged during the 2008?09 crisis still linger, investors continue to avoid equities. For a while, extreme caution drove almost all new flows of funds into cash and U.S. Treasury bonds. As these flows drove down Treasury and agency yields, investors sought returns in more credit-sensitive bonds, but still, they largely avoided equities. The pattern has by now distorted valuations enough to present a special opportunity in stocks, even after their impressive rise from spring 2009.

Custom at this time of the year asks people to look back for reasons to give thanks. Though for investors the political-economic turmoil and risk of the times seem at first blush to yield little along such lines, a dispassionate reprise of the last year does, in fact, offer more material for thanks. To be sure, economic and financial matters are far from perfect or even second best. But still, they have improved during the last 12 months, in some instances, dramatically. Here are five reasons for thanks.

President Obama has singled out exports as a preferred driver of the U.S. economy. He plans to double their size over the next five years. Since the president, apart from announcing this goal, has offered hardly any substantive policy for export promotion, the goal resembles a wish as much as anything else. Nonetheless, it is plausible. Dollar weakness, among other things, has already lifted American exports smartly during this cyclical recovery and likely will continue to do so for some time, even if Washington dithers.

With the Federal Reserve seeming to embrace another round of what it calls ?quantitative easing? and what the cognoscenti in the financial community quaintly refer to as ?QE2,? a couple of questions naturally emerge: first, will the additional monetary ease help the economy? and second, is it warranted? On both counts, the weight of argument seems to fall on the negative side, though in the short run the added liquidity will likely boost markets.

Despite poor housing sales this past spring, the residential real estate market fundamentally seems to have found stability. Significant growth in housing will, of course, likely wait for years, and there is no mistaking the risks, especially if banks fail to manage foreclosures and the effective 'shadow inventory' of unsold homes. But for all the potential pitfalls and the lack of growth, probabilities still suggest that the economy has already passed through the ugliest period for housing and that the healing has begun.

Although export-oriented Sweden initially suffered during the 2008?2009 global economic downturn, the economy bounced back quickly, achieving one of the fastest growth rates among developed economies. Unemployment, which had been forecast to rise to 10 percent of the work force, never went above 8 percent. The reason for Sweden's success may be the country's approach to economic stimulus. Instead of relying heavy government spending, Sweden?s government reserved two-thirds of its stimulus for across-the-board tax cuts, applied only to income generated from work.

Mexico's drug-related violence is a tragedy for the country and a conundrum for all those who invest there. However, as long as the U.S. economy can continue its advance, slow as it will likely be, Mexico?s economy, equity market, and currency should find support. Once the recovery in the United States begins to create jobs, as it should later this year and into 2011, remittances from Mexican nationals working north of the border will begin to add marginal momentum to Mexico?s economic growth, and hence to its market prospects.

The rise in commodity prices during the past few weeks offers yet another sign that the U.S. economy will avoid the dreaded double-dip recession and continue to grow, albeit slowly. Some of the commodity price rise, of course, reflects little on the economy. Gold's price increase, for instance, mirrors generalized fears on a number of fronts. The surge in agricultural prices stems from particular crop failures. However, industrial commodities, including energy, are connected to the economy, giving broader economic significance to their healthy price gains.

The recession and huge market reverses of 2008?2009, aside from their immediate adverse effect on revenues, have revealed decades of fiscal mismanagement. Now the ongoing economic recovery should gradually relieve the most acute fiscal pressures, and states and cities will have to rectify the mistakes of this long legacy. For the long-term municipal bond investor, the risk going forward resides in the debt of the laggard states and cities, those that do the least to correct the abuses of the past. The investment opportunities lie with those who do the most to correct fiscal imbalances.

More than anything else, a relentless increase in operating leverage colors earnings behavior, particularly in times like the present. Because businesses continue to seek efficiencies by increasing the use of equipment, software, and facilities in the production process, it also seems likely that earnings will become even more volatile. Equity markets may eventually discount the fundamental change but, in the interim, they too promise volatility along with earnings. That volatility offers opportunities to investors who are aware of the situation.

In the midst of all the uncertainty these days, one comfort to which investors have clung is the record $1.8 trillion in cash on corporate balance sheets, by some estimates. But of late, even this bright spot has come into question. The cash holdings, some have argued, are more than offset by a continued growth in corporate debt and other liabilities. Matters are, as ever, more complicated than they appear, but corporate finances (even after considering liabilities) nonetheless look firm enough to offer something positive in the economic and investment climate.

It is still hard to see the United States following in Japan?s footsteps, as so many have suggested of late. The differences between the two economies remain vast and still far outweigh any similarities. Probabilities suggest, then, that the United States will miss a Japan-like deflation and a lost decade and that, if America suffers deflation at all, it will do so for only a short time. But since the differences are less pronounced than they once were, matters bear close watching, as each nation?s policies unfold and their respective economies react.

The euro seems to have the edge over the U.S. dollar for the very near term, if only because the EU seems poised to shake off the lingering negatives of its spring crises. Beyond that, the dollar seems to have the edge. More rapid growth on the west side of the ocean should trump modestly higher rates on the east. Longer term, however, the shifts again back to the euro, as European governments should be further along than the United States in addressing the fiscal excesses that all nations concerned incurred during the 2008?2009 crisis.

If Japanese prime minister Naoto Kan wants to avoid the pitfalls of the past, he must take a longer-term, more gradualist approach to the nation's fiscal problems and find solutions that avoid heavier taxes. His present inclinations, however, suggest that Japan will in fact make the old mistakes and will consequently wait longer for sustained growth and, as in the past, will find little fiscal relief.

The Bush tax cuts of 2001 and 2003 are set to expire at the end of this year. If the president and Congress just sit on their hands, income taxes will rise across the board, from the lowest to the highest brackets, as will estate, capital gains and dividend taxes. Much debate swirls around the economic effects of these imminent tax increases. Most agree that the heightened tax burdens will detract from the flow of spending and the general dynamism of the economy.

Small capitalization equities, until recently, have done remarkably well, tempting some to conclude that these sorts of stocks have done their thing and that it is now time to migrate increasingly toward the large side of the capitalization range. A slight underperformance by small stocks since April may have reinforced this reasoning. It would be a mistake, however, to abandon small capitalization holdings altogether in favor of large cap issues. In six of the past 10 economic cycles, small caps continued to lead large caps in the second year of a recovery, and sometimes even longer.

The ongoing and widespread concerns about an economic double-dip warrant still more discussion. Previous analyses here have looked at the government data and concluded that, whatever the risks, the probabilities favor continued, if moderate economic growth. This discussion extends the analysis to less common economic indicators, particularly measures of shipping. Though the picture here is mixed to be sure, it, too, leads to the conclusion that the double-dip, though possible, is not probable and that growth will likely continue, albeit slowly.

The market will begin the next 18-24 months with multiples neither high nor low. Treasury and corporate bond yields, however, look low relative to the same history over which the historical multiples are calculated, seemingly leaving room for stocks to carry higher-than-average multiples. At the same time, prospects for further earnings gains seem good. Earnings have come in 25?30 percent above the easy comparisons of the past year, and as long as the economy continues to grow, which is likely, these good earnings figures should continue.

It seems these days that half the headlines in the financial media fear a double-dip recession, as do half the conversations on Wall Street. There certainly are risks, not the least in Europe's financial difficulties. But still, there are reasons to question such widespread concerns. History, after all, offers only one true double-dip experience, and that grew out of a policy error. Moreover, the actual data on the economy flies in the face of such an outlook. Milton Ezrati outlines seven reasons to doubt the double-dip outlook.

Double-dip fears are on the minds of investors, and Europe?s troubles feature large. Concerns in this particular area run along three lines: first, Europe will fly apart and precipitate another financial collapse; second, stagnation in Europe will stall world growth; and third, dollar appreciation will weaken the American economy by choking off exports. Each concern is legitimate, and the risks real. But especially on the last two, the American economy is much less vulnerable than people suggest.

Even in the face of signals that this labor market is, if anything, improving a bit faster than history would suggest, it is too early to rest easy. The intensity of the layoffs during the recession of 2008-09 could suggest that something very different is happening in this cycle and that rehiring may be held off longer than it might otherwise appear or not happen at all. Furthermore, the extended unemployment benefits may keep workers out of work - European style - much longer than they have typically stayed out.

It will take months to sort out all the implications of the immense health care bill, with all its arcane provisions and so-called 'fixes.' For all the uncertainty, however, it seems definite that the government will play a new role in student lending, that taxes will rise, that insurers will receive millions of new customers, that generic pharmaceuticals will benefit and that federal budget deficits will grow despite Congressional Budget Office projections. Finally, if the November elections bring a backlash, there could be new rounds of negotiations and reforms.

As investors have gained confidence that financial markets have healed and economic recovery has begun, their concern has increasingly turned to the flow of federal red ink. While not all deficits lead to bad markets, there is reason for concern. The White House forecasts huge budget shortfalls in the years to come, and the deficit-narrowing plans it has offered rely almost exclusively on tax increases. Other considerations such as economic growth, a balanced monetary policy and earnings improvements, however, may allow stocks to rise even in the face of fiscal woes.

The main lessons for investors from the past 18-24 months are that emotion is the enemy of good investing, and that time-honored investment principles, even if they frustrate, still provide the best likelihood for success. The S&P 500 Index rose more than 65 percent in the first quarter of this year from their March 2009 lows. The ultimate losers in this situation were those who succumbed to the ugly mood of a year ago and, despairing over the efficacy of and long term investment principles, sold out. By contrast, those who held onto their investments benefited from the recent rally.

If history is any guide, small capitalization stocks will continue to lead the recovery in equities. Small growth stocks led during the recovery phase in seven of the last 10 business cycles, and small value led in two. Large capitalization led only once, in 1953-54. Consistent with the trend, small value has led the present recovery so far by a wide margin. It is unclear, however, whether that margin will last.

Projected deficits will remain too large for too long to avoid raising serious concerns about inflation, the dollar's value and the economy's fundamental growth potential. When investors return to these questions, chances are that the bond vigilantes who made pricing so tumultuous in the early 1990s will come back. Those vigilantes were unwilling to tolerate any red ink in federal finances during the Clinton administration. If President Obama wants to prevent bond vigilantism, he must end the current policy uncertainty and present a credible, balanced plan to control the future flow of debt.

The latest White House budget proposals reveal that fiscal policy will offer little control over the river of red budgetary ink already at flood. The White House expects the deficit to run at $1.6 trillion, up from last year's record $1.4 trillion, taking the deficit up to about 10.6 percent of GDP. Furthermore, despite optimistic growth projections, deficit forecasts barely get below 4 percent of GDP by 2014. These deficits would raise the country's overall debt from the present $7.5 trillion to $18.6 trillion, or about 80 percent of GDP, by 2015.

Greece's public debt has risen to 110 percent of its gross domestic product, and its budget deficit stands at 14 percent of GDP, well above the EU limit of 3 percent. This has raised concerns about other European states with questionable finances, including Portugal, Ireland, Italy and Spain. The political risks of a Greek default, however, will probably motivate other EU nations to support the troubled country.

Despite recent financial turmoil in response to policy initiatives in Washington and fears surrounding the finances of Portugal, Ireland, Greece and Spain, markets are up since the beginning of 2009, and are likely to grow this year. Emerging markets have the best prospects for growth, but their success depends on the precarious recoveries in the United States, Europe and Japan.

Despite recent financial turmoil in response to policy initiatives in Washington and fears surrounding the finances of Portugal, Ireland, Greece and Spain, markets are up since the beginning of 2009, and are likely to grow this year. Emerging markets have the best prospects for growth, but their success depends on the precarious recoveries in the United States, Europe and Japan.

Just when investors thought they knew what to expect in terms of financial regulation, the Obama administration proposes something new. In his latest article, ?The Regulatory Muddle Continues,? Milton Ezrati, Lord Abbett Partner, Senior Economist and Market Strategist, compares and contrasts the House legislation with recent proposals from the White House and examines the impact on banks and lending.

Milton Ezrati examines the history of Fed Funds rate hikes and the response of the bond markets. He concludes, based on the evidence of the 2004-2007 experience, that bond investors should not be fearful of rate increases.

?Now with a turn to accumulation, especially if it occurs in a compressed period of time, inventories could add as much as two percentage points to overall growth. Under such an influence, an otherwis

Now at the start of a new year, Congress is debating regulatory legislation that will shape the financial landscape for years to come. In his latest article, ?Regulatory Refinement,? Milton Ezrati, L