Mr. Market, wont to wearing his heart on his sleeve, reacts, reflects — and anticipates. Marching always to its own drummer, the market in 2007 should, likewise, behave true to character. And indeed, nothing is expected to kill the bull, forecasts our Research Roundtable panel of Wall Street experts.
Most markets climb a wall of worry. So too, the 2006 market. In ’07, look for the same phenomenon — what with inflationary pressures, a deflating housing bubble and uncertainty over short-term interest rates.
The new year is likely to see growth stocks and large-cap firmly take the lead — finally — over small-cap and, in a turnabout, U.S. stocks outperforming international equities.
The nation may see a short-term economic slowdown and with it, increased market volatility. But without a doubt, next year’s market is one in which to participate. Remember: It’s the third year of George W. Bush’s second term, and not since 1939 has there been a negative presidential Year Three.
(Laguna Beach, Calif.) CEO, Chief Portfolio Manager and Director of Research, Al Frank Asset Management, managing $800 million in assets. Editor, The Prudent Speculator newsletter; co-editor, The Prudent Speculator Tech Value Report. Manager, the $290 million Al Frank Fund, with an annualized five-year return of 16.73 percent through October 5, 2006.
David N. Dreman
(Aspen, Col.) Chairman and CIO, Dreman Value Management, L.L.C. Forbes columnist (“The Contrarian”). Managing editor, The Journal of Behavioral Finance. Manages $18 billion in assets, including the $8.3 billion DWS Dreman High Return Equity Fund, with an annualized five-year return, for Class A shares, of 8.79 percent, through September 30, 2006. Dreman sub-advises five DWS funds; one SunAmerica fund; and the new Dreman/Claymore Dividend & Income closed-end fund, as well as VA and separate accounts.
Kenneth L. Fisher
(Woodside, Calif.) CEO, Fisher Investments, which manages $32 billion in assets. Forbes “Portfolio Strategy” columnist for 22 years. Author, The Only Three Questions that Count (John Wiley-2006).
(Santa Fe, N.M.) Co-Portfolio Manager and Managing Director, Thornburg International Value portfolio, totaling $8 billion-plus in assets and with an average annualized return of 12.14 percent since its May 1998 inception.
How would you describe the state of the stock market now?
Buckingham: A teeter-totter market: One sector or segment rallies while another descends. Then it goes back the other way. Large-cap stocks have awakened. That’s why the Dow Jones Industrial Average has finally got back to an all-time high. But it’s bifurcated: a market of stocks, not a stock market; a rising tide that has not lifted all boats. Professionals are skeptical about this rally. That makes me feel there’s a lot of money on the sidelines that may eventually come in.
Fisher: We’re part-way through a longer, more extended bull market. It’s been four years in a row of Up, Up, Up.
Dreman: An upward-trending market — not a roaring bull market but stocks are moving up at a reasonable clip. However, investors are worried about housing, adjustable mortgage rates. It’s a mixed picture.
Trevisani: The best word to describe it is “resilient.”
What’s your general outlook for the market next year?
Fisher: As the market gets higher and higher, fear of heights makes the likelihood of increased volatility greater and corrections potentially bigger. Next year will be a strong one for the stock market with, someplace in the middle, a bigger — though short, sharp — correction than we had this year. It’ll be caused by some irrational concern that comes out of no place and will freak people out.
Trevisani: We think valuation and growth potential remain attractive. Globally you’ve got some recovery going on in Europe and Japan. The dollar weakness has moderated somewhat, which bodes well for foreign exporters. And the continued moderation in the price of oil and other commodities will be a relief to consumers and many corporations.
Buckingham: Equities are poised to move higher, since [even] with this year’s bad news — like the Israel-Hezbollah conflict and the collapse of a major hedge fund [Amaranth] — they really didn’t decline.
Dreman: I’m optimistic. Stocks are much more conservatively priced than they’ve been in well over a decade. There’s very little chance of a major fall from here. The market will do reasonably well, or better, trending up to 15 percent, even higher. Earnings are supposed to be up 10 percent, but that might be a little high. You’ll have more upside than downside — a good place to invest your capital.
With International’s outper-forming the U.S. market over the past few years, how is foreign investing shaping up now?
Trevisani: Japan and Europe are in the early stages of a recovery. The growth in developing markets, like China and Asia ex-Japan, continues. Overall, valuation remains low. You have the opportunity to buy less expensive global companies with high dividend yields, and that will continue. Rarely is the U.S. the best global market performer, so to be invested internationally makes a lot of sense.
What are the risks?
Trevisani: A severe slowdown in the U.S. would have a tentacle effect and impact export economies around the globe. We don’t expect that to happen, though. [But] money into International is slowing, increasingly; and a risk could be an asset reversal. However, that’s more supply-demand than structural. We think economies around the globe are healthy.
What’s your outlook for the U.S. economy?
Buckingham: Corporate profit growth, in all likelihood, isn’t going to be as strong, though we think it will be above-trend. I don’t see a recession on the horizon: a growth rate of 21/2 percent to 3 percent is reasonable. The economy will be all right; and “all right” is good enough to have at least a 10 percent to 12 percent return on equities, if not a little more.
Fisher: It’s largely barreling along. Next year will be a good one for corporate earnings; there are lots of ways for them to go up. The consumer is in a very healthy condition. The economy is just fine and will be next year.
Trevisani: A modest global interest rate environment will allow corporations to keep investing at healthy levels and continue to grow their businesses.
Dreman: We could have a slow-down, but it won’t last a long time.
We’ll probably see higher prices continue to work through the economy — moderate inflation.
What about interest rates?
Buckingham: I don’t see rates going much higher than they are today, and we may even see them come down a little as economic growth starts to slow and inflation remains contained.
Dreman: Interest rates are near the bottom of the scale. I’m not so sure the Fed will cut rates because there’s still a lot of inflation in the system. We’re starting to see some higher acceleration in the rate of wage increases. That, obviously, isn’t a good sign. Lowering interest rates in the face of potential inflationary forces doesn’t make a lot of sense. It would be a blunder to cut rates. The Fed would look foolish.
What’s in store, then, for the bond market?
Fisher: It will have a low, single-digit positive return.
Buckingham: I don’t see rates moving dramatically.