Business Week's Jan. 5 conference featured a discussion of the investment outlook for 1995, based on the Dec. 26, 1994, issue, with BW Chief Economist William Wolman. The moderator was Jack Dierdorff of BW Online.
OnlineHost: Tonight Business Week presents a conference on the hot topic of Where to Invest in 1995. That was the subject of the yearend double issue, and our guest is the editor who supervised its preparation: William Wolman, BW's chief economist. Bill Wolman's career at Business Week began in 1960. A native of Canada, he graduated from McGill and holds a PhD from Stanford. He's a familiar face to viewers of CNBC, where he's a commentator six days a week, and he has won many awards for his insightful writing and editing on Business Week.
The master of ceremonies tonight is Jack Dierdorff, consulting editor of Business Week Online, whose experience on BW dates back even further than Bill's but who is enthusiastically making a transition into cyberspace. Welcome to BW Online!
JackBW: Good evening, Bill and all of you on AOL. First, so you'll know who's talking, JackBW is Jack Dierdorff, and WolmanBW is our guest star, Bill Wolman.
Wolmanbw: Hi, everyone.
JackBW: Bill, 1994 was a year when stocks went nowhere and bonds were deep in the slough of despond. I hope you see better for us this year. Will the Dow hit 4000 soon?
Wolmanbw: Yes. It could happen before the end of January. There is little inflation, and it looks as though the Republicans will cut spending as well as taxes.
JackBW: Bill, we're all concerned about more income, so try this.
Question: Where in the world can you go to get better returns on your investment than you can here now?
Wolmanbw: Many countries--Canada and, yes, Mexico--pay higher interest rates than the U.S. The problem is that their exchange rates can fall, so there is risk. It's a tough call--but try Chile.
JackBW: Bill, this one may look as if it's for both of us--but you're the one to answer.
Question: Jack, where do you think the capital-gains tax will go with the Republicans?
Wolmanbw: We will get a capital-gains tax cut retroactive to January. It's about as good a bet as you can make. As a matter of fact, it was our Washington bureau's best bet in the Investment Outlook issue. [The Dec. 26 issue contained a feature on best bets for the year ahead.]
JackBW: We've been hearing a lot from Walmarc on our message boards--and here's a question he sent up from tonight's audience.
Question: Bill, should the U.S. go back on a gold standard for monetary policy to rid the U.S. of a high deficit and control inflation?
Wolmanbw: Definitely not. I would not want to see the U.S. on a monetary standard that depends on decisions made by the Chinese, Russians, Indians, and South Africans--they are big factors in the gold market. You can control inflation by controlling the money supply without going on a gold standard. Just ask Milton Friedman!
JackBW: Our Investment Outlook issue talked a lot about stock groups to look at. Now Skapone would like some details if you can sketch broadly, Bill.
Question: What stocks look good for '95?
Wolmanbw: The conventional favorites are utilities and energy stocks. I like utility stocks because interest rates will fall, the regulatory environment is favorable, and there are good technological developments. I don't like the oil stocks because the cost of production is falling rapidly outside the OPEC countries. In the long run, you make money in growth stocks that sell cheap. There have been some big sell-offs in technology, and so there are some good buys even in biotech. Look at the technology stock article in the Investment Outlook issue.
JackBW: Bill, Shemani is concerned about interest rates vis-a-vis the market.
Question: Hi, Bill/Jack: Everybody is talking about how the first half of 1995 will be a tough time for investors because of an anticipated interest- rate hike. Hasn't this anticipation been factored into the price level of stocks and bonds?
Wolmanbw: That's the big question, Shemani. I believe that interest rates will fall during 1995 because inflation is under control, monetary policy in the developed countries is prudent, and the U.S. will cut spending more than people think. So I'm betting on lower interest rates with the long bond close to 7% by the end of the year. That is a modestly favorable outlook for the stock market. So I'm bullish on stocks, which will do better than in the past two years.
JackBW: Bill, on interest rates, I'm gratified to see that you agree with what your fellow BW economist Chris Farrell said in our conference on Monday!
Wolmanbw: Yes, Jack. Most people at Business Week think that rates will fall. We will sink or swim together.
JackBW: Now here's a question about betting on the Third World from SBerger11.
Question: What about Third World countries that are becoming industrialized?
Wolmanbw: There have been big declines in Third World stock markets over the past year, and that creates opportunity. I believe that some of the markets that really sold down last year like Turkey could be good investments for the long term. I know it's not fashionable, but I even like Mexico now. A word of warning: Third World capitalism is frontier capitalism and is inherently unstable and volatile. So don't buy emerging-market stocks or funds unless you are ready to wait a long time, like five years, to take out your money. But if you have this long horizon, they are the place to go.
JackBW: Like many of us, BobbieAZ sounds as if she doesn't want to wait for a long time for a return on her investment.
Question: So where should we be investing in '95--if income is a concern?
Wolmanbw: Another of the Investment Outlook issue's best bets was a two-year Treasury bond. These short government issues have an amazingly high return as compared to long bonds. Also, there is little risk, because you can always hold them to maturity and get your money back.
JackBW: Bill, asset allocation can be a tricky business, and how to do it is NeatM's question.
Question: Would be interested in your advice about investing in global funds. I'm 51 years old and haven't been investing very long, but I can control where my retirement money is allocated (stock fund, aggressive stock fund, and global). Any counsel about percentages that are wise?
Wolmanbw: There are some really interesting fund managers with a global outlook. They also have deep insight into the Third World because they do careful research. If I were a global investor, I would definitely go the fund route if I didn't know some country very well. Two points: Don't put more than 25% of your equity money into emerging markets, and, for goodness' sakes, dollar average into these markets. Don't make lump-sum investments. But I do believe that this is where the growth will be, and that's where the money will be made.
JackBW: We haven't been to Asia yet, at least not specifically, and that's where BillR888 wants you to look next, Bill. Plus, he's a TV fan of yours!
Question: Bill, what do you see happening in the Asian markets, other than Japan. Any chance for recovery in stock prices in '95? By the way, I really enjoy your CNBC spots.
Wolmanbw: The political outlook in China is cloudy, and that creates problems for all of the Tigers. Even though Mexico is a problem, I like Latin America better than Asia for that reason. Still, markets like Hong Kong have really taken gas, and the Asian country funds are selling at deep discounts from net asset value. I also like some of the new funds that are being set up in the Middle East. They cover Morocco, which I really like--having just been there. But remember: diversify--and dollar average.
JackBW: Bill, on behalf of the millions of mutual fund investors, here's one from SpecInt.
Question: Since 1994 was fairly bad for mutual funds, will 1995 be any better?
Wolmanbw: Since I believe that interest rates will fall, and the economy will avoid a recession, the coming year should be somewhat better for mutual funds than the past two years. If I can advertise a bit, our annual mutual fund issue will be out in early February. All our best thinking will be there, and I'm sure my colleague, Jeff Laderman [JeffBW], will have a conference soon after the issue comes out. In the meantime, you can look up our mutual fund coverage for all of 1994 in our BW Online Mutual Fund Corner.
JackBW: Thanks, Bill. Now I have a question for you that combines several that have come in. Newt Gingrich is running hard with his Contract for America. If it passes, what's in it that will be good for investors? Bad?
Wolmanbw: That depends, Jack. It's obvious that the market has not been celebrating the Republican victory. That's because there is a concern that the zeal for tax cuts will exceed the zeal for cutting spending. If it doesn't, then the budget will come into better balance and the markets will cheer. My own hunch is that Wall Street is underestimating the willingness of Congress and the President to cut spending. So I believe that Washington will send positive vibes to the financial markets. As soon as Wall Street recognizes that Washington is serious about cutting spending, there will be a rally--the Gingrich rally. How long it will last depends on whether there will be a budget that is both prudent and serves the real needs of the American people, including the poor.
JackBW: I can't believe we've gotten this far in a discussion of the financial markets without a mention of Orange County. So here goes, Bill:
Question: Does the Orange County debacle make muni bonds a steal now?
Wolmanbw: "Steal" is a bad word, since the crookery is already over. But, yes, I do think that many municipal issues are good buys now, particularly since I believe that the overall level of rates will decline.
JackBW: Bill, again combining questions, what about the January effect? A lot of people don't know what it is--and will we have one this year? If so, then what?
Wolmanbw: Good question, Jack. There hasn't been much so far. That is to say, small-cap stocks have not gone up sharply this month. It's when small-cap stocks go up faster than large-cap stocks that the January effect is at work. In this sense, the first few days of January have been bad. But I do think we will have a January effect once Wall Street recognizes that Washington is serious about reducing the deficit.
JackBW: We're crowding the clock, Bill, so one final question, from Pat Rebel.
Question: Mr. Wolman, what do you think the economic outlook for homebuilding is for 1995? And do you think 30-year fixed mortgage rates will rise above 10.75%?
Wolmanbw: Homebuilding will stay flat, and no, since I think that long-rates will decline, I also believe that we are close to the peak in the rates on fixed mortgages. And if that's true, then the rate on 30-year fixed mortgages will not rise to 10.75%.
JackBW: Thanks so much, Bill Wolman, for your incisive answers--and thanks to all of you in the AOL audience. I'm sorry we couldn't answer all the probing questions you asked. If you'd like to discuss these topics further, visit our BW Online Message Boards and explore all the other many features of BW Online (keyword: BW).
JackBW: We'll have another live conference Sunday evening, at 9 pm ET in the Coliseum, to discuss this week's cover story on the Mexican crisis.
OnlineHost: That concludes tonight's conference by Business Week Online on the investment outlook for 1995. Thanks to all of you in the audience and to Bill and Jack--and be sure to visit BW Online at keyword: BW.
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Copyright 1995 McGraw-Hill, Inc. All rights reserved.
