Business Week Chief Economist (and CNBC commentator) William Wolman presented an update on the 1995 investment outlook in the Apr. 10 BW Online conference.
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OnlineHost: Good evening and welcome! Tonight Business Week Online has a special treat--BW Chief Economist William Wolman (normally WolmanBW but BillWolman for this event) updating us on where to invest in 1995, with one quarter down and three to go. Bill first joined BW in 1960 but has taken time out to work in Wall Street, banking, and TV. He's been back on the staff since 1984.
A graduate of McGill and an economics PhD from Stanford, Bill appears six days a week as a commentator on CNBC. Many of his stories for BW have won awards, and he is co-author of The Beat Inflation Strategy and The Decline of U.S. Power.
The moderator of tonight's event is Jack Dierdorff (JackBW), consulting editor of Business Week Online. And now for your questions--and Bill Wolman's answers--on the investment outlook as he sees it now for the rest of the year.
JackBW: Good evening to all of you on AOL. And hi, Bill Wolman.
BillWolman: Hi, everyone.
JackBW: Here's the first question for you, Bill.
Question: Bill, since you last appeared on AOL, the stock market has had a fairly spectacular runup. How has that changed the investment outlook?
BillWolman: Good question. The market has indeed been strong, with the Dow going up more than 9% and the S&P 500 10%. Ordinarily, this is a good enough gain to keep money managers happy for a whole year. But the market didn't go up much in 1993 and 1994, and I have a feeling it will go up some more this year. That isn't to say the next couple of months will be great, but I do think that by the end of the year the Dow could easily hit 4500, and the other indexes could do proportionally as well.
JackBW: JoeD1234 asks about the declining dollar vis-a-vis the investor.
Question: I see lots of news concerning the dollar's status vs. the yen, but no one seems concerned. How should this concern us?
BillWolman: It's amazing, isn't it? My own feeling is that smart people think that the yen and the mark are overvaluaed. If they didn't, there is no way that the U.S. stock market could be rising right now, or that the U.S. bond market could be as stable as it has been. There's an old saying, that a bull market climbs a wall of worry. And what's most amazing about this year's rally so far is that it has occurred despite dire warnings about the impact of the weak dollar. To me, this is the best sign that we are still in a bull market.
JackBW: Bill, will there be a Gingrich market?
BillWolman: I can't resist noting that a company called Corrections Inc., which runs privatized prisons, is one of the leading issues on the exchanges so far this year. But apart from this, there will be a Gingrich market if--and only if--the large tax cuts that were passed by the House are either modified by the Senate or are matched by virtually equivalent spending cuts. To me, the most credible threat of a market crash is another lurch toward an irresponsible budget deficit. One other point: There will be a capital-gains tax cut this year, thanks to the Republican victory, and that is a plus for the markets.
JackBW: BW cannot recommend specific stocks or other securities. However, Bill, what do you see as the likely leaders among market sectors?
BillWolman: There's been a good run-up in the stocks that benefit from the lower dollar, because they earn lots of money abroad: Coca-Cola and the like. There's probably a little more of this play left. But I believe that interest rates will fall for most of this year. So I think that financial stocks are undervalued. I also think that the capital-goods sector will stay strong. And I like those stocks, too.
As some may remember, I recommended utilities at the beginning of the year. They've been a little shaky in the past few weeks, but I still think you should hang in, remembering that if you bought at the beginning of the year, you're still ahead. Still, they aren't now among my favorite groups.
JackBW: Bill, you've just answered part of this next question--but not the first part.
Question: Where do bonds go from here? And, related question, where do you see interest rates heading?
BillWolman: Tomorrow, the price indexes for March start coming out. And trying to forecast interest rates tonight is truly a mug's game. Still, though this month could be shaky, I believe that interest rates are headed lower. The ability of the bond market to withstand the weak dollar is an incredibly bullish sign. And since I do expect price increases to come in lower than the bond bears believe, I still like bonds. How about a rate on the 30-year of about 7% by yearend? That, at any rate, is my forecast.
JackBW: RicDav wants some thoughts on the computer sector.
Question: Why have computer stocks such as Compaq and Gateway done so poorly in the past few months while Intel does so well?
BillWolman: I don't like to comment on individual stocks, particularly in the computer sector where there are people at BW who know a lot more than I. However, it's obvious that Intel has ridden through the "inaccurate" Pentium scare, and its capital-spending program is so overwhelming that it seems safe to say that it will compete effectively for as far as the eye can see.
JackBW: The next one:
Question: What do you see as an optimum asset allocation plan for now?
BillWolman: Good question: 30% U.S. bonds, 70% stocks. Of that, I would put most in the U.S. stock market. But I think there are good opportunities in other countries as well. For my sins, I still think that the Mexican bolsa, which is now off "only" 35% so far this year, when valued in U.S. dollars, will recover. And I also like other Latin American markets that have sold off. I am less bullish on European markets. But I also think there will be some gains in the Pacific Rim markets outside of Japan.
JackBW: Look across the Pacific for a moment now, Bill.
Question: Will the Japanese market continue to sink?
BillWolman: I think that there are problems in Japan that will continue to hurt that country's markets. BW has been writing about problems in the Japanese financial sector, and it's obvious that the high yen is hurting Japan's corporate sector. Accordingly, I do not see Japan as a prudent place to invest--though there could be a short-term rally if the Japanese central bank, as some expect, cuts interest rates from their already low level in the next few days.
JackBW: Jebber brings us back home, literally.
Question: Do you see an end to the new-home sales slump around the nation but especially in the Northeast? What is your forecast for direction in the stocks of big builders such as Pulte, U.S. Home, Centex, and Ryland?
BillWolman: Since I expect interest rates to decline, I really do think that housing will make some recovery from what almost amounts to a debacle in the early months of this year, especially February. But real income is growing slowly, and the demographics are against a rapid housing recovery. So when it comes to housing stocks, walk, don't run, to your nearest broker.
JackBW: Sherbs3 asks for your opinion on another market sector.
Question: How do you feel about the communications sector?
BillWolman: There is no doubt that telecommunications is the fastest-growing sector of the world economy. There is also no doubt that this growth will continue. I do not believe that the pace of growth of the telecom business is as yet fully reflected in stock prices. Accordingly, remembering that a long time horizon is required in an area like this, I would gradually commit to this area.
JackBW: Bill, another trip outside our borders.
Question: Aside from Mexico, would you recommend any emerging markets?
BillWolman: The answer is yes. But two things are true. First, dollar- average into any of these markets. Don't make lump-sum investments. Second, make sure that your time horizon for investing is long. Five years is not too long. But the fact is that the emerging countries will grow more rapidly than the developed world, and that many of those countries are getting their economic policies under control. Accordingly, I believe that a diversified portfolio of emerging-market funds will perform extremely well.
JackBW: StrngeLuv moves to another U.S. stock sector.
Question: What about health care? Specifically, HMOs.
BillWolman: My own instincts are that the recovery in the HMOs because of the Clinton health plan and the Republican victory is already reasonably complete (cough). The logic of health-care costs in Washington strongly suggests that HMOs and other sectors of medicine will not escape some form of price or cost controls. There is simply no other way to get a handle on the federal budget. Accordingly, I would look to other sectors for happiness--that is, a stock that doubles every year.
JackBW: Braza asks about TV--which may get some stiff competition from cyberspace, I might add.
Question: What is the direction of television in the next five years?
BillWolman: That's a conflict of interest for me :). There was a time when I believed that TV was where the action is. Which is why I got involved in the field. I now think, however, that TV has its future as part of the Information Highway, and will just be another online way of providing information in the future.
JackBW: Jumping fast among stock groups, take this from Orwellfarm--and call me in the morning!
Question: Are we likely to see the same kind of growth in drug stocks that we saw in the 1980s?
BillWolman: I do believe that progress in research in genetic medicine is so great that the drug industry simply has to prosper over the next decade. In fact, I don't really believe that the growth in revenues and profits from genetic research has even begun as compared to where things are going. So this is just like emerging-market stocks, though obviously at the other end of the technology spectrum. Dollar-average into the industry and invest with a long horizon in mind. There is no way that technological progress will be anything but stupendous in drugs.
JackBW: Wilme has the next question.
Question: Is it time to switch from the Dow leaders into the Russell 2000 universe?
BillWolman: That is a good question. And I wish I could give you a conclusive answer. So far this year, the big-cap stocks have prospered as compared with smaller caps, because they are the beneficiaries of the dollar's decline. But if the rally continues, and I believe it will, it will spread to the Russell 2000. Worth noting, that as of today's close, the NASD combined is up 9.22% for the year, compared with 9.44% for the Dow. So at least one group of smaller-cap stocks has almost caught up already.
JackBW: RicDav is back with another for you, Bill.
Question: Do you believe in the efficient-market hypothesis?
BillWolman: My answer to that question is that I'm neither a believer nor a disbeliever. I'm an agnostic on the efficient-market hypothesis. It does seem to me that recent research in the academic world does cast doubt on efficient markets--and that there are some mutual funds, for example, with pretty consistent performance records that are superior. That, too, casts doubts on efficient markets. But outriders--that is to say, people who consistently beat the market--are few and far between. If you meet one, don't let him (or her) go.
JackBW: BSabatini also asks about how you analyze market behavior.
Question: Do you favor fundamental analysis or technical analysis when choosing a stock--or a combination of both?
BillWolman: Answer: I'm an economist by training, which means I'd be a traitor to my profession were I a technician, and I'm not a technician. To me, technical analysis is mumbo-jumbo. But I could be wrong.
JackBW: Try this next, Bill.
Question: The gold bugs are trying to glitter again. Has gold become a good investment?
BillWolman: What is surprising is how little gold has gone up, given the troubles with the dollar. So I think the gold bugs are crawling up the wrong metal. Remember, before you listen to them, what a stinking investment gold has been over the past decade and a half. Gold was over $800 an ounce in 1981. It's now under $400. Tell that to the next gold bug you see. As a matter of fact, step on him.
JackBW: I fear we're out of time. Thanks, Bill, and thanks to the audience. Sorry we couldn't take all your questions.
BillWolman: Thank you, Jack.
OnlineHost: Thanks to Bill Wolman and the Business Week team for this update on investment strategies for the balance of 1995. If you'd like to continue the discussion, we invite you to move to the BW Online Chat Room or to post your comments and questions on the BW Online Message Boards (try the Economics & Finance category).
Transcripts of all BW Online conferences are available for downloading soon after the event (look under Special Events, Talk, or Search BW). While you're at it, explore all the features of Business Week Online (keyword: BW). And sign on Thursday, Apr. 13, for another special conference, on how small business can succeed in the export markets (8pm ET, Globe).
Plus, of course, every Sunday evening at 9pm ET in the Globe there's a BW Online conference with editors or newsmakers. Hope to see you soon again--thanks and good night!
Copyright 1995 McGraw-Hill, Inc. All rights reserved.
