December 22, 2024

Wealth Matters: Sticking by Rosy Predictions for the Stock Market

This is fairly remarkable given what the first quarter brought: natural disasters, serious problems at a Japanese nuclear reactor and revolution and unrest in the Middle East. That politicians in the United States are bickering along party lines, with the budget hanging in the balance, seems trivial by comparison.

“If we had all sat down in January and predicted we’d have turmoil in the Middle East and Africa, a devastating tsunami in Japan, an earthquake in New Zealand, housing continuing to go down, oil over $100 a barrel and policy makers still fighting with each other, we might have been tempted to say that 1,400 for the S. P. looked aggressive,” Marc Stern, chief investment officer at Bessemer Trust, said of his year-end stock index prediction. “But the market hung in there well because of corporate earnings.”

Richard Madigan, chief investment officer for J.P. Morgan Private Bank’s global access portfolios, was equally impressed with how the stock market weathered this spate of shocks. “It’s staggering what we saw and how well behaved the market was,” he said. “I don’t believe the markets would have behaved as well as they had over the past three months if investors were fully invested.”

That was the silver lining for those who analysts who made bullish calls. Many people were still hesitant to invest their cash despite predictions that the stock markets would rise steadily this year.

Back in January, Mr. Stern predicted as much, saying that stocks would have to rise more before most investors would buy equities again.

To one contrarian, waiting on equities is not a bad thing with the prospect of inflation still low. “Domestically, you don’t have the source of factors to create inflation,” said Richard Cookson, chief investment officer at Citi Private Bank. “You have broad monetary policy crawling along. You have a situation where unemployment or underemployment is extremely high. You don’t have the ability for employees to gouge more from their employers.”

So with the second quarter under way, let’s see what our group sees for the rest of the year.

CONSENSUS The big debate when I spoke to this group in January was over whether the time was right to move money from bonds to stocks. With the exception of Mr. Cookson, the consensus was that it was.

Those beliefs are even firmer now. “It is important to point out that stocks have not been this cheap to bonds since 1980,” said Niall Gannon, director of wealth management at the Gannon Group at Morgan Stanley Smith Barney. “We see a global equity strategy focused on where the earnings are produced.”

To that end, he treats Japanese equities like American companies because the United States consumes so many Japanese products, while he considers Nike a non-American company because only 25 percent of its earnings come from sales here.

Some suggestions for variations on stocks have not fared as well.

Bill Stone, chief investment strategist at PNC Wealth, said he favored dividend-paying stocks in January but admitted that they performed better in February when the stock market lost some value than they did when the market was strong.

Still, he said he believed that Cisco Systems announcing its first dividend ever in March was a sign that such stocks could come back in vogue. “It’s still a nice play in risk-reward terms,” he said. “I think we’re at the very beginning of the reallocation into equities, and that makes it attractive.”

Mr. Stern said he continued to believe that convertible bonds were right for people who want more return but were still hesitant about putting a lot of money into equities. “If the stock went up 25 percent, the convertible bond could go up 12 to 15 percent,” he said. “If the stock went down 25 percent, the convertible bond would roughly break even.”

SURPRISES Beyond the earthquake and tsunami in Japan and the unrest in the Middle East, there were other unexpected changes.

On the positive side, the unemployment rate has dropped to 8.8 percent. Mr. Madigan had predicted that it would hover around 9 to 10 percent for the foreseeable future. “I’m thrilled that I was wrong,” he said. But he said he did not think there would be real economic growth until employees were paid more.

The worries about a wave of municipal bond defaults seem to have been overdone — or at least premature. Mr. Gannon said his group created a model with a 2 to 3 percent default rate for the year, but he now sees that as too high. And even if that default rate occurs, he said it would not have a huge impact on portfolios with higher-grade municipal bonds.

Article source: http://feeds.nytimes.com/click.phdo?i=70b5d1111d2931e1ca5d50b1029b33c2