Cynthia R. Plouche sees strong economic growth this year, although she tempers her forecast with concern about Iraq.
"You need a resolution of the Iraq situation to get a truly positive sentiment from investors," she said. "We aren't seeing a lot of hiring right now," she said. "Consumers are carrying the load. So the economy isn't firing on all cylinders, and won't until we get through the Iraq thing."
Ms. Plouche sees a U-shaped recovery for the year, a sharp rebound. "I think we are on the upside of the economic recovery now," she said. "We are in the early stages."
"I think the (latest) Fed rate cut (by 50 basis points to 11/4%) was helpful," she said. "And the midterm elections were positive for the economy."
She sees hiring intentions improving in the first quarter and coming to fruition later in the year.
"Inflation will be a non-event," she said.
"I don't think interest rates will go much lower."
She thinks the Federal Reserve is unlikely to raise rates until August, when it may seek to quell inflation concern as the economy recovers. "The Fed will raise rates when capital spending picks up." She said rates may rise 100 basis points on the short end.
"If you put the kibosh on lower interest rates now, you could risk the economy not rebounding."
Ms. Plouche is keeping the duration of her portfolio neutral to start the year. For intermediate duration accounts, it is 2.5 years, and for core bond portfolios, close to four years.
The risk of war "forces me to keep duration neutral and keep more Treasuries in the portfolio in case there is a safe-haven rally."
Among the fixed-income sectors she favors: "I continue to like mortgage-backed securities, because they tend to perform well in a flat- or rising-rate environment, which is what we will see in 2003."
"We like callable securities," she said. "You have a higher coupon to take on the risk the corporation will call the bond. But as rates go higher, there is less of a chance the bond will be called."
Fixed income hasn't been an easy refuge, amid the stock market turmoil, she said. "The sheer force of the corporate market tumble put a pervasive fear into the marketplace," Ms. Plouche said. "There was nothing sacred."
Cynthia R. Plouche
Chief investment officer
Abacus Financial Group Inc., Chicago
Assets under management: $200 million
Treasury bills: 3.4%
10-year Treasuries: 5%
20-year Treasuries: 5.9%
Euro to dollar: $0.9925
Yen to dollar: 115
Total return for fixed income: 5.5%
Salomon Broad Investment Grade index: 930