SANTA CRUZ -- The U.S. economy hasn't normalized yet, but Comerica economist Robert Dye is more optimistic and Comerica's chief investment officer Dennis Johnson predicts a good year for the stock market.
About 125 people heard them speak Wednesday at a Santa Cruz Chamber of Commerce lunch at the Hotel Paradox.
"I think we're going to hit that sequester March 1," Dye said, referring to automatic federal spending cuts taking effect without Congressional action on the debt ceiling.
He expects Congress will focus on that issue during the summer and enact some tax reform that would result in lower tax rates with "everyone paying more taxes."
With federal spending exceeding tax revenues, "either we bring tax revenues up or spending down," he said. "I expect we will do both."
He called the U.S. payroll growth of 157,000 jobs in January as "neutral," adding, "We need to be above 200,000 on a consistent basis." That's different from a year ago, when he said the economy would "feel different" if jobs increased at the rate of 150,000 a month.
Since then, rising home prices have brought a "wealth effect," Dye said. "We're still underwater but we're going in the right direction."
U.S. housing permits increased 1.8 percent in January, a positive sign, and car sales were up in November, as people replaced vehicles damaged by Superstorm Sandy.
With cars on the road 11 years old on average, Dye expects auto sales will go
Despite potential negatives from consumers cutting spending (70 percent of the economy), businesses being overly cautious about investment, U.S. health care costs, European and Asian economic woes, and so-called "transitory" factors such as oil prices, Dye contends they will be trumped by low interest rates and the quantitative easing policy, the rising stock market, construction pick-up, pent-up demand from households, a renaissance in energy and manufacturing and technological advances.
Interest rates are expected to stay low through mid-2015.
"Now is a great time to talk to your local banks," Dye said.
Johnson said Comerica shifted investments from 70 percent in the U.S. and 30 percent international to 40 percent international in September and 50 percent international in January.
"Now the international markets are outperforming the U.S.," he said.
People who bought bonds as a safe investment with yields of 8 to 10 percent will not get those returns now, he observed.
"Asset allocation is very important if you're overweight in bonds," he said, noting Comerica reduced its fixed-income investments by five percentage points by adding alternative assets and plans to do so again next month.
Johnson suggested stocks with high dividend yields, consumer staples, health care and utilities, and companies with high recurring revenues in technology, financial and consumer sectors.
"Investors are bearish," he said. "We do not have to worry about being the last person to invest in the stock market."
The alternative investments he recommended include residential and commercial real estate, commodities and currencies.
Responding to questions, Dye called the housing market improvement was "a nice surprise."
In his typically balanced fashion, he said, "The drag from the Great Recession will be with us for a long time," then added, "We're going to get our mojo back eventually."
Lillianne Dykstra of Santa Cruz Community Credit Union voiced concerns about lack of investment in education, to which Dye said, "Your concern is very well-founded."
Johnson said the No. 1 challenge when he talked to a business audience in Grand Rapids, Mich., was "finding someone to hire with the skill set they need for the jobs they have."
Reggie Knox of California FarmLink said his organization, which is backed by Comerica, makes about 25 loans a year to small farmers and is planning a finance expo at 12:30 p.m. Tuesday at the Corralitos Grange. With more support, more loans could be extended, Knox said.
Follow Sentinel reporter Jondi Gumz on Twitter at Twitter.com/jondigumz