BofA-Merrill Lynch Sees Slow, Sustainable Recovery Ahead
Market observers for weeks have pointed toward a perceived bottom in the US housing market and broader economy. Analysts are identifying what may be a slow, sustainable economic recovery that will keep inflation and interest rates low, according to a Banc of America Securities-Merrill Lynch (BAS-ML) research report Thursday. "The US is exiting its worst banking crisis and recession since the depression," the report reads, in part. "No sector is more exposed to the broad US economy than Financials." Gains in the US financial sector likely indicate overall economic recovery, as earnings-per-share (EPS) among US financial institutions are highly levered to credit costs, which BAS-ML researchers expect to peak this year. "Financial EPS can surge even if household spending and borrowing remains sluggish," researchers said in the report. "Sluggish [gross domestic product] promotes a steep yield curve. BAS-ML economists expect the Fed to remain on hold until early 2011." Core inflation will likely remain low as labor markets experience a large supply of unemployed workers and a shortage of job openings. The rally seen this summer as the US economy reached a sense of stability -- particularly in house prices -- is likely to continue, researchers said. Recovery may slow in coming months, however, as a typical recovery sees 50% of the prior peak recovered in the first six months and the remaining 50% recovered over the following 14 months. BAS-ML researchers noted six months have passed since investors feared a nationalization of the banking industry in March. "But now with exactly six months having passed since the March lows," researchers added, "investors should have increased confidence that the market bottom is behind and that we are in the early stages of a sustainable, albeit slow, economic recovery." Write to Diana Golobay.