Moving Past the Fear

Grant Bowers
Vice President and Portfolio Manager
Franklin Equity Group

Global stock markets have been volatile the last few months as investors have focused on a number of headline issues, such as the European debt crisis and the Gulf of Mexico oil spill. Despite market volatility, we believe the U.S. economy is firmly in recovery mode and on the road to stable economic growth in the coming years. When looking at the U.S. economy, we see the seeds of a recovery starting to take hold in the form of a modest increase in construction spending, strength in manufacturing, a slowdown in jobless claims and stabilization in the housing market.

On a more detailed level, our discussions with management teams indicate that U.S. companies are relatively healthy, with many carrying low debt levels and strong cash positions while reporting increasing demand from their end markets. We believe this demand could continue to grow as much of the U.S. economy is currently in the middle of an inventory restocking phase that should last into 2011 (see Chart below). Low interest rates and strong corporate profits are leading the way for companies to start replenishing their inventories to meet expected increases in end-market demand.

In terms of sectors, we continue to have a positive outlook on technology. We are focused on owning high-quality growth companies that have strong business models with the ability to produce sustainable growth in earnings and cash flow. Many technology companies offer products that drive productivity and lower the cost of doing business.

Despite the positive economic news coming from the U.S., we recognize that the pace and strength of the recovery may continue to cause volatility in the financial markets. Historically, economic recoveries have rarely been quick and smooth and have instead often led to market volatility. At the Franklin Equity Group, we are focused on finding and owning what we think are the highest-quality growth companies in the market. We believe that a well-diversified portfolio of these quality companies may outperform over the long term. Near term, if investors can move past their fears, we believe there are great opportunities for potentially beneficial long-term performance, particularly in U.S. equities.

U.S. Total Business Inventories, Seasonally Adjusted
Monthly Percent Change
May 2009 - May 2010

Please click here for more information on the FTIF - Franklin U.S. Opportunities Fund.