The panelists are optimistic about what they forecast to be the sixth year of the bull market. No, they’re not wearing rose-colored glasses: In interviews this past October, they factored in weaker corporate earnings, credit market problems, housing instability, the dollar’s decline. Still, their general outlook is upbeat about both the stock market and the U.S. economy. Indeed, despite concerns, no one on the panel is predicting a recession in the final year of George W. Bush’s presidency.
Some of our experts look for healthy large-cap returns in sectors such as banking, energy and technology. In foreign investing, Europe and Asia — especially China — are focal points. What’s up? Read on.
The Roundtable Members Are:
JOHN BUCKINGHAM (Laguna Beach, Calif.) CEO and Chief Investment Officer, Al Frank Asset Management, managing $875 million in assets. Editor, The Prudent Speculator newsletter; co-editor, The Prudent Speculator Tech Value Report. Manager, the $270 million Al Frank Fund, with an annualized five-year return of 24.48 percent through September 30, 2007.
DAVID N. DREMAN (Aspen, Col.) Chairman and CIO, Dreman Value Management. Forbes columnist (“The Contrarian”). Managing editor, The Journal of Behavioral Finance. Manages $22 billion in assets, including the $9 billion DWS Dreman High Return Equity Fund, with an annualized five-year return, for Class A shares, of 16.73 percent (net), through September 30, 2007.
KENNETH L. FISHER (Woodside, Calif.) CEO, Fisher Investments, which manages $45 billion in assets. Forbes “Portfolio Strategy” columnist for 23 years. Author of The New York Times bestseller, The Only Three Questions That Count (John Wiley-2006).
WENDY TREVISANI (Santa Fe, N.M.) Co-Portfolio Manager and Managing Director, Thornburg International Value portfolio, totaling $17.5 billion-plus in assets and with an average annualized return of 14.8 percent (A shares), through September 30, 2007, since its May 1998 inception.
What’s your outlook for the stock market in 2008?David Dreman: There are a lot of contingencies. How bad is credit going to be? Are we going into a recession? The dollar is sinking. Higher inflation. It’s a tough one. It’s going to be very volatile. There aren’t a lot of places to go.
Buckingham: I’m optimistic. The fourth year of a presidency is statistically favorable. The economy is slowing, but valuation is still attractive. Interest rates are low. Corporate America is in pretty good shape.
Fisher: Next year will be another very good year — in the realm of 20 percent-plus. Stocks are very cheap compared to the cost of long-term interest rates. By the end of this year we’re going to have a resurgence in both stock buy-backs and takeovers driven by public companies.
Trevisani: Globally, growth remains relatively robust. There’s plenty of opportunity outside the U.S. for continued economic expansion.
What specifically do you see happening in international?Trevisani: The bulk of our diversified portfolio of a limited number of names is invested in Europe, [but] we see growth continuing in emerging markets. We’re primarily in advanced emerging markets. Nowhere else can you find a telecommunications company that’s adding 5 million subscribers a month like China Mobile, or a pure-play manufacturer like Embrear or a retailer that’s able to grow its same-store sales like Wal-Mart de M?xico.
Buckingham: Investors shouldn’t flee U.S. equities because the conventional wisdom is that you need to invest overseas. The world is a global economy; everything is interconnected. You can invest in a company headquartered in Peoria that sells products to European manufacturers and sources products in Asia.
Dreman: Foreign investing has been outstanding this year, but most of it was currency gain as the dollar fell. When the pendulum swings, you lose it just as fast.
So then you all disagree with Ms. Trevisani when it comes to emerging markets?Fisher: They’re leading the world very much the way tech did in the mid-1990s: When the market goes down, emerging markets go down less. [But] when it’s over, emerging markets will behave badly.
Buckingham: There’s a lot of danger there. In the short run, emerging markets will continue to intrigue investors; in the long run, many people are going to be disappointed.
Dreman: Go back to 1998 and the Russian and Far Eastern crises. Some of those markets were down 40 percent or 50 percent. The companies just unraveled.
What do you foresee regarding inflation next year?Dreman: The one thing I’d bet on is that we’re going to have higher inflation than most people think before the end of next year.
Buckingham: We don’t have a lot of inflationary pressures on investors. It’s one thing to say everything costs more; but when you’re doing the calculation as the government does it, inflation is not that big a problem.
Do you predict more interest-rate cuts?Dreman: There may be further cuts, but it would be a disastrous thing. You can cut interest rates in a productive manner only when you’re not fighting the kind of inflation that we may face.
Trevisani: There will be more cuts, not only in the U.S. but in Europe and the U.K. The U.S. runs a bigger risk of inflation if they make too big a mistake. But in Europe and the U.K., the consumer has been pretty strapped. A decline in interest rates would be beneficial for their economies — and perhaps provide some support for the U.S. dollar as well.
Buckingham: It wouldn’t surprise me if there would be additional fall-out from the credit crunch and the housing slow-down, so we may see another cut or two. That would be positive for the stock market.
Fisher: People who are pinning everything on the Fed are missing the point that Fed cuts are kind of 50/50. Remember that it cut rates in 2001 and 2002, and the market didn’t go up.
What’s in store for bonds?Dreman: With the threat of more inflation, I certainly wouldn’t want to buy bonds or fixed-income securities. If I needed income, I’d buy very short maturity bonds, but I wouldn’t go further than that.
Fisher: Look for bonds to go sideways, the way they’ve been for the last few years.
What do you predict for the U.S. economy in general?Dreman: On one hand, the Fed has cut interest rates to stop the sub-prime and liquidity crisis from getting worse. On the other, inflation is still rising. But on the whole, I’m optimistic.
Fisher: Since the stock market is going to be fine, the economy is going to be OK. The market is the best leading indicator. Today the U.S. is one-third global GDP. So if the rest of the world is strong, the U.S. is going to be just fine. Once upon a time, if we had a recession, we dragged the rest of the world down. Today, the rest of the world will drag America forward.
Buckingham: We’re not going to have a significant downward move in the economy, nor are we going to have a big spike up in growth.
So none of you thinks the U.S. will fall into a recession?Buckingham: The market is an anticipatory mechanism. Therefore, many investors have already priced in a recession — or something close to it — which was what was going on last summer.
Dreman: I don’t see us going into a real recession, but we could see earnings’ rate of increase come down to almost zero — they could even be down a bit because a lot of prices will be rising with inflation.
Do you share Mr. Dreman’s views?Buckingham: If you can grow earnings at 7 percent, that’s still pretty gosh-darn good.
Fisher: Earnings will be better than people expect because we’re going to be shrinking the supply of equities through stock buy-backs and takeovers.
What are your expectations for U.S. employment and consumer spending?Buckingham: Spending has got to slow based on the fall-out from housing. But never underestimate the strength of the American consumer: after 9/11, people went shopping.