What do you expect to come out of the Federal Reserve meeting tomorrow [March 28]? Most economists are predicting another increase in long-term interest rates. Is that the case for you as well?
I think it’s the same for virtually everyone. I think 99.9% of all the analysts and economists do believe that, but I think I’m looking for something else. Everyone knows they are going to raise rates 25 [basis points] but I’m looking for clues as to when they are going to be finished. I have to admit that I probably will be disappointed. We know that in this environment, they are clearly moving more aggressively in reaction to what is happening in the overall economy. [At the meeting] we’re going to get some more of that, and if they tell us that they are going to look at inflation and economic growth more closely, people will think that they are giving us information, but they really aren’t. We will need to look at the inflations statistics and growth statistics to get clues as to what they are going to do. But I think that we’re going to get a pretty clear signal that the Fed is close to the end [of raising interest rates.] I think the end is one of two tightenings away from this move they’ll release tomorrow.
When do you think we can expect to see the next two Fed tightenings?
I think in the next two meetings we will have possibly one or two more tightenings. My best guess right now is that they’ll probably stop at 5%.
How do you think tomorrow’s meeting will affect equity purchases and fixed income security purchases? Do you expect there will be a slowdown?
That’s a great question because one of the things the markets will be looking for are any clues whether or not they are realistic or misleading as to when the Fed is going to finish raising rates. If the Fed comes out with a hawkish statement indicating that they are going to do a lot more than the market’s expecting, than the market is going to fall off. If the Fed provides a friendly message, than we probably will see the equity markets doing a lot better.
With that said, [Federal Reserve Chairman] Ben Bernanke has promised to be less ambiguous than, some say, he’s been so far. What do you think tomorrow’s meeting will do for him?
One of the things that Bernanke has learned, is that even though the intentions are to be a lot more clear, being more clear sometimes reduces flexibility. Even though the first intention and the first hope is to be very clear and articulate, Ben Bernanke will opt to be less clear than he’d like to be in order to maintain policy flexibility. You probably saw the best example of that in his speech before the Economic Club in New York when people went into that meeting thinking that he was going to be a lot clearer. I think that his intention is to be clear, but in an environment where the policy decisions are so delicate, where the Fed is getting very close to the top, its tough. I think if we would have had one of these meetings a year ago or two years ago, when the Fed was in the early part of their tightening cycle, I think Bernanke could have afforded to be a lot clearer, but as you get closer and closer to the end, being very clear comes at a price because it removes, or reduces, or eliminates so much flexibility.
In this economic environment, what should the typical portfolio look like? Where should assets be allocated heading into the second quarter?
Right now, I think this is the fifth consecutive year when investors will earn more from global investing than they will from domestic investing. That’s clearly been the theme of the last four years and I’m certainly telling our clients that we should be investing more globally. Many markets oversees will probably outperform U.S. equities, and that includes the Japanese market and perhaps even the European market. To the extent that the dollar stabilizes, or perhaps even takes a hit, that will only enhance the performance of global equities versus U.S. equities.
Standard & Poor’s released data last week indicating that, historically, in the second and third quarters of a presidential administration’s second year, things slow down a little bit. Does this give you cause for concern?
Not at all, because in the second part of this year, my expectation was that with profits slowing and with the economy slowing, we will get another non-stellar performance year. During a study I did two or three years ago, I actually went back and looked at all the S&P 500 performance over the last 50 years, I broke the S&P’s performance down by year in the presidential cycle and the rationale behind why the performance is so good in the third year [and not so good in the second] is because the equity market usually anticipates what happens in the economy and profits six to 12 months into the future. Iit doesn’t matter whether you have a Democrat or Republican in office, usually if you have an election coming up, magically, the economy will do better.
What’s the overall economic forecast for the remainder of the year?
We’ll probably see that the first calendar quarter will be the strongest calendar quarter of the year. Obviously, a lot of the growth we had in the first quarter was due to weather. Weather was very friendly and you probably know from the National Data Climate Center that January was the warmest [January] on record, and I think they started taking records in January 1895. The warm weather caused home activity to be a lot stronger, along with retail sales-even industrial production, which turned out to be weak. You have to ask ‘Why was it weak?’ It wasn’t because manufacturing was weak. It was very strong, but utilities’ output was weak because we used a lot less heating oil and natural gas than we normally would because the weather was so warm, but you had a huge negative payoff in February and March. We started from such a high base that the first quarter will be the strongest and then from there, it’s downhill. We’ll probably see about a 3.2% or 3.25% for growth rate after growing last year, something around 3.5%. We are going to get a revision to real GDP that may push up last year’s numbers to 3.6%, but so far the number on record is that we grew about 3.5% last year and 4.2% the year before. We’ll probably grow about 3.25% this year, so we’re seeing a continued deceleration in growth.
With that deceleration, what sectors are you looking at for individual portfolios to hedge against potential loss?
I love technology still because, in a world where the economy is slowing and profit margins may be contracting, companies may want to spend a little more on technology to boost overall profit margins. The energy sector is still an exciting sector. Energy prices aren’t going down anytime soon. In fact, I think that since energy prices have been high for so long, this will mean that exploration stocks, the stocks that focus on drilling for more oil, will probably do a little bit better, and refining companies, like Valero, will continue to do well in an environment where prices are high and refining capacity is pretty scarce.