Broker Talk: Can the Recovery Continue?

Now more than one year after the peak of the financial panic, where do markets go from here? These brokers offer mixed views.

Who's Talking: Dirk Hofschire, Fidelity's Vice President of Market Analysis

The Gist: Credit conditions for small businesses will need to improve to build on economic recovery.

With the Federal Reserve continuing to offer short-term interest rates near zero, "the conditions for future profitability remain extremely supportive," says Hofschire. However, much of the increase in bank reserves is still sitting idle, which means we're "not out of the woods yet." Delinquency rates -- or loans with overdue payments not yet in default – are still rising and are expected to continue rising. That means banks may continue to feel more comfortable holding onto capital to protect their balances sheets than to increase their lending, says Hofschire. Commercial real estate loans are the biggest concern for lenders, since their prices keep dropping and now are at levels not seen since early 2003. The resulting commercial real estate loan defaults have forced banks to make writedowns on their balance sheets. The number of small and medium-sized banks shutting their doors is also still on the rise, though the number isn't even close to the level reached after the savings and loan crisis of the late 1980s and early 1990s, he says.

The true test of the financial system's health going forward is whether there is enough credit to support a recovery, says Hofschire, and on that front, the "one-year report card remains mixed." Large corporations have had success issuing debt in the bond markets, but smaller businesses, which rely mostly on smaller regional banks, are having a harder time with "restrictive credit conditions." A recent sentiment survey showed that small businesses feel credit conditions are as bad now as they were at the height of the financial crisis in October 2008, he says. Meanwhile, in the U.S. consumer market, it is still difficult to qualify for a mortgage despite extraordinary support from the Fed on mortgage rates.

What are the investment implications of all this? The recovery will take longer than most other downturns because credit is tighter in the aftermath of financial crises like these, says Hofschire. The main credit-related problem going forward will be for smaller businesses, "which have been historically critical for new job creation," he says. Dramatic improvement in the financial sector helped the rebound in stock and bond markets over the past few months, but small businesses – which provide more than half of all private sector jobs – must rebound to see more progress.

Who's Talking: Jeffrey Saut, Managing Director at Raymond James

The Gist: Speculation that the U.S. economy is at the "end of an era" is overblown; the recovery will continue.

Some market analysts have been referencing the 1930s in predicting where the market is headed next. Renown financial historian Niall Ferguson, for instance, recently said on "Charlie Rose" that the United States will suffer the same fate as Britain after World War II, when the U.K. was deeply in debt and the British pound set on a path for decline as the world's reserve currency. Saut says he doesn't "buy the idea that our nation is at the end of an era." He admits, he says, that the U.S. is "in a hard spot" but it is also on a path to "creative destruction." That means labor and capital in the U.S. are "moving from dying industries to growing industries" such as electric cars, biotechnology, green companies and infrastructure.

As for the equity markets, Saut says he has been waiting for a correction since the beginning of October but that he continues "to think it is a mistake to get too bearish" since, by his estimations, too many S&P 500 stocks are now oversold. Despite the "bad mouthing" about the market, "all stocks have done over the past month is consolidate their July-September rally by moving sideways," he says. Saut says portfolio managers that are underinvested are likely to chase "winners" since the March lows in sectors such as emerging markets, technology, finances and precious metals.