In comparing our commentaries prior to the markets upturn with our current viewpoint, we see only one significant difference: our belief in positioning our portfolios for economic recovery has turned from an outlier opinion into the consensus.
Indeed, news on the economic front continues to confirm what we have been telling our clients since the depths of the bear market. High productivity, low interest rates, low inflation and stimulus-driven fiscal and monetary policies all point to continued strengthening of the US economy. The benefits of corporate cost cutting are beginning to show with improved earnings and excellent operating leverage, which is another way of saying that much of the increase in revenue will flow directly to a company's bottom line. Another important factor to note is that return on capital continues to improve, and is well above the cost of capital for most US companies. We are now seeing signs that business capital spending is increasing and once the capital growth phase becomes established, we expect the market to advance further.
Other signs we are looking for to confirm that the economy and markets are continuing to improve include strong inventory growth, increasing merger and acquisition activity, continued investment in capital by businesses, and finally additional hiring. Another positive is the increasing pace of IPO and secondary stock offering activity, as companies access to capital had previously been limited for the most part to the fixed-income markets. Although such access to the debt markets allowed many companies to refinance debt at lower rates and extend maturities, equity capital improves the overall quality of the balance sheet and lowers risk.
Global opportunities also appear very favorable as economic growth seems to have taken hold in much of Asia and the European capital markets forecasting a rebound with support from the past years strong equity markets. Mr. Greenspan's reflationary efforts are applying pressure on Japan and Europe to either fight deflationary risks in the global economy and ease monetary policy or face a much cheaper dollar and risk slowing exports. The risk of trade wars have heightened as a result, but the alternative deflation cycle is likely a worse scenario. Instead, with some co-operation, the world trade concerns can be reduced.
During 2003, this outlook meant that we focused on positioning our portfolios more aggressively but without investing in companies that ran a higher risk of collapsing should the recovery take too long to materialize. As the market shifted to an even more aggressive posture, many distressed and truly speculative issues enjoyed large gains. Our investment philosophy, which requires a long-term assessment of a company's business value, kept us from investing in such questionable fare; but careful issue selection and top-down themes drove our participation in this up-phase of the market. We believe that the opportunities among the distressed debt and equity portions of the market has now largely played out, as rising valuations and lowering credit-risk concerns have rendered these issues less speculative, and with less upside. Going forward, we believe the more level playing field will allow stronger companies such as those we favor to gain market recognition.
Our outlook remains focused on economically sensitive cyclical names and on companies that may benefit from either increases in business spending or from consumer discretionary spending. The cyclical recovery in earnings as well as the sharp increases in stock valuations in the past year should provide a strong backdrop for these sectors of the economy. While these concentrations have served the Funds well over the course of the market turnaround, we are monitoring both the markets and the economy to assess when shifts in these themes may be beneficial. This is consistent with our discipline, as we strive to maintain the proper risk/reward profile in each of our strategies throughout all phases of the market cycle.
Moving into an election year, we believe that the markets strong fiscal and monetary support will continue, and we are positioning the Funds accordingly. The Feds reflationary policy does run the risk of higher inflation. At this point though, we feel that the short-term risks are not great, especially if the Fed and Congress reduce stimuli (by raising short-term rates and reducing spending) within the next 6 to 12 months, thus providing a more stable and sustainable long-term growth and inflation backdrop. Longer term, we believe returns will depend largely on trends in inflation, interest rates, and productivity remaining favorable and not changing significantly from the current long-term levels. As with other unknowns in the market, we do not attempt to predict the timing of such shifts, but rather continually focus on risk management through diversification, vigilance, and a readiness to adjust the portfolio with new opportunities as trends become clearer. As always, it is through adhering to our investment discipline that we have an unwavering commitment to value-added performance over the long term.