Where to invest at midyear was a special feature in the June 19 issue of Business Week -- and the subject of the June 11 conference, with BW Chief Economist William Wolman and Senior Writer Jeffrey M. Laderman.
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OnlineHost: Good evening and welcome! Tonight Business Week Online brings you, in its regular Sunday evening conference, a discussion of where to invest -- based on the Midyear Investment Outlook package in the current issue (June 19).
The speakers are William Wolman (BillWol), chief economist of Business Week, and Jeffrey M. Laderman (JeffBW), BW senior writer and mutual-fund maven extraordinaire. Bill Wolman, a graduate of McGill with a PhD in economics from Stanford, first joined BW in 1960 but has taken time out since then to work in banking, on Wall Street, and in TV. Now a regular commentator on CNBC, he has been back at BW since 1984.
Jeff Laderman covers the stock market and mutual funds -- the latter most notably in the annual BW Mutual Fund Scoreboard and in his book, Business Week's Guide to Mutual Funds. He's a graduate of Rutgers and the Columbia Graduate School of Journalism who joined BW in 1982.
Tonight's moderator is Jack Dierdorff (JackBW), consulting editor of BW Online, who retired as managing editor of the magazine two years ago. And now on to your questions about where to invest.
JackBW: Good evening to all of you on AOL. And hi, Bill Wolman and Jeff Laderman.
BillWol: Hi, Jack, nice to be here.
JeffBW: Hi Jack, Bill.
JackBW: Bill, I have the first question for you two. The stock market is going gangbusters, and yet there are rumblings of recession. What's the midyear outlook for investors, summing up?
BillWol: BW's position is that there will be, at least probably, a mild correction over the next short while, but that the market will go on to make new highs later in the year. Two basic reasons: We expect interest rates to fall a little more, and the Fed to ease in August. Also, productivity growth is so rapid that earnings are holding up surprisingly well and will continue to do so, even though the economy flattens out.
JackBW: Jeff, can you add from the point of view of a mutual-fund watcher?
JeffBW: This year has been a little disappointing for equity mutual funds. The funds underperformed the market by 5 or 6 percentage points. They're making money, but not what they hoped for. I think they'll try to make it up in the second half.
JackBW: RCWI11 wonders if the market has peaked -- and also asks this.
Question: My mom is a widow at 46...has $300,000 -- where to invest?
BillWol: As already indicated, we expect a little correction in the short run, but then we expect the market to move up again, so it hasn't peaked. At 46, it's probably a good idea to slowly put about half of her money into the stock market, so that she can dollar-average. Most people do not have enough stocks in their portfolio.
JackBW: Is she a candidate for mutual funds, Jeff?
JeffBW: Here's the commercial. Get the BW Mutual Fund Scoreboard, and choose from the top-rated diversified funds, not top-rated tech funds.
JackBW: Lady Jane's question might also lead to general comments on technology stocks.
Question: Do you have any ideas how the Justice Dept. inquiry into Microsoft will affect the stock?
BillWol: Good question. This kind of thing never does the stock of a company that Justice is inquiring into any good.
BillWol: With IBM's offer for Lotus approved today, it seems to me that Microsoft will face enough competition without Justice gumming up the wheels of the market. So I would guess, and I stress it's a guess, that Justice will cool it on the latest probe of Microsoft.
JeffBW: Look at this way: The breakup of AT&T was great for shareholders.
JackBW: JoelF36061 has a fund question for Jeff.
Question: I have noticed that several small-cap and aggressive growth mutual funds that I have are not doing as well as large-cap funds in the first half. Are they likely to catch up in the second half of the year?
JeffBW: We think so. Most of the money has been made in large-cap stocks. We think the mid-caps and small-caps will get their chance in the second half.
JackBW: Turn to inside the Beltway vis-a-vis Wall Street now.
Question: What's the market impact of Washington's battle over the budget and taxes?
JeffBW: The market likes talk of balanced budgets and capital-gains-tax cuts.
BillWol: I think that there's a sense among big money managers that there will be some modest reduction in the size of the budget deficit -- but not nearly as much as Newt and his colleagues are talking about. So I think that the impact is mildly positive, because it will cause interest rates to be lower than if nothing were done about the budget.
JackBW: GerardV1 is looking much further away than Washington.
Question: When do you think the Japanese stock market will recover?
BillWol: That's the $64 billion question. Our sense is that there is a liquidity crisis in Japan, with the market as of Friday night only 100 points away from a 10-year low. We believe that there might be some help later this summer because by then the Japanese deflation will be so evident, even to Japan's officialdom, that Japan will stimulate its economy. But if the Japanese market goes into a free-fall, look out, because the Japanese may start pulling their money out of the U.S., since stocks are part of the portfolios on the balance sheets of companies in Japan.
JackBW: Asset allocation questions seem popular tonight -- here's one from BobWild. Jeff?
Question: I have a friend who is getting a $100,000-plus cash settlement. How do you suggest he invest it? He is currently debt-free and has some regular savings.
JeffBW: What's his age? When will he need the money? If it's longer than 10 years, stocks are the way to go. Find several good mutual funds -- growth, small-company, foreign -- and feed the money into the funds over a year's time.
JackBW: Here's something of a challenge to BW's economic forecast.
Question: What makes you people so sure we can avoid a recession, as you say in your published outlook?
BillWol: Easy. We believe that the Federal Reserve will ride to the rescue, if the economy really does show signs of decelerating. But notice, our forecast for the current quarter is not all that strong. Jim Cooper and Kathy Madigan, who do our forecasting, only expect the growth rate to be 1.4% this quarter -- though things may pick up next quarter. We do not have our heads in the sand. We recognize that there are downside risks in the economy, and if things start to deteriorate fast, we will let you know.
JackBW: Tnjr wants you to elaborate, Bill, on what Japan might do to our markets.
Question: What would happen if the Japanese cut down on the Treasury bonds they purchase, as a result of a trade war?
BillWol: The answer is nothing good. As you know, there were rumors in the market on Friday that just this kind of thing was happening, under orders from the Japanese Finance Ministry. The rumors were denied flatly by the Finance Ministry. But, as I said, there is a liquidity crisis in Japan. So Japanese banks and companies could have to sell bonds to raise cash. What we can hope is that the Japanese government comes to the rescue before this happens -- comes to the rescue with something like the U.S. S&L bailout. But the situation is tricky. Again, we'll try to keep you posted.
JackBW: Jeff, how about explaining the bond market's behavior to us?
Question: Last year we had the worst bond market in decades. Now there's a big rally in bonds and rates are down again. What's going on?
JeffBW: Probably last year's sell-off was overdone. And this year's rally has struck a lot of people as too much, too soon. But people were very soured on bonds late last year, and bonds were "underowned." So with the first good news on inflation, slowing economy -- "soft landing" -- they rallied big.
JackBW: RJDOWLING wants to know about interest rates.
Question: Where do you think a 30-year fixed-mortgage rate will be by September?
BillWol: About a quarter point lower than now.
JeffBW: About where they are now.
JackBW: That's what makes an editors' meeting!
JackBW: Bill, this is obviously for you.
Question: In April you said your target for the Dow was 4500. What is it now?
BillWol: 4700 by the end of the year. Rates will be lower, and the best guess is there'll be no recession.
JackBW: Jeff, can you give us another explanation?
Question: Why have equity mutual funds done so poorly in returns so far this year compared to the S&P averages?
JeffBW: Good question. Funds usually lag in a quick runup becuase they carry cash. But the reason they fell behind here is they tend to own smaller companies than are in the S&P and the Dow.
JackBW: Bill, for you?
Question: If I'm betting on a cut in interest rates by the Federal Reserve, when should I take the plunge?
BillWol: I repeat, my best guess is that the Fed will cut in August. As you have seen, the market pushed interest rates up in the last couple of days of last week, and that reversal could continue for awhile. So my best guess is that you should wait at least another couple of weeks before you move. By the way, there is no sign of a strong bounce-back in the economy as yet. Auto sales were el stinko last week, according to the best survey I know of.
JackBW: Jeff, Thaddaway would like his investment savvy ratified.
Question: I'm in an S&P 500 Index fund. Does this look like a sound investment for the next three to five years?
JeffBW: Sure does. Over long periods of time, index funds beat most mutual funds.
JackBW: JONDUDE2 is the first one tonight to bring up biotech.
Question: What is your opinion regarding stocks involving genes, since within a decade it is supposed to be so prevalent?
JeffBW: They said that a decade ago, too.
BillWol: There is no question that biotech is a technology that will make the silicon revolution look like nothing before it's all over. So I would not give up on biotech stocks. The trick, it seems to me, is a diversified portfolio based on the best research you can find.
JackBW: From biotech to high tech, via Tailgate2's question.
Question: Is the high tech sector out of steam or just consolidating?
JeffBW: I'll take it. Just consolidating. There's still very strong demand for semiconductors, and that's the raw material for the whole computer industry. Long term, it's the place to be, and I would look to buy on pullbacks. Incidentally, tech stocks tend to sell off in the summer. So make your list and wait.
JackBW: By the way, Jeff and Bill, what is your favorite market sector at the moment?
BillWol: Although the banks are making some bad loans, I like financial services, including banking. The spreads between what the banks pay for money and what they charge for it are really big. The real money is in credit cards, where margins are far higher than anywhere else. So find a bank that's a big credit-card issuer. It would also be nice if it were a takeover candidate, since there'll be plenty of consolidation in banking over the next five years.
JackBW: Jeff?
JeffBW: I like banks, too, plus technology stocks. I believe the export sector of the economy is strong. These companies are doing well because they're better competitors. And the cheap dollar gives them an edge over others. Small-company stocks are also undervalued relative to large companies. Small-com-pany mutual funds will give you a good, diversified slice of this sector.
JackBW: Jumping over national borders again...
Question: Is the Mexican bolsa a buy now?
JeffBW: Not yet. Mexico has made a lot of progress, but it hasn't been restored to health.
BillWol: I agree. I think there may be another downward leg soon. But it will not go back to the old lows. So walk, don't run, to your favorite broker of Mexican stocks.
JackBW: This one's for you, Bill.
Question: Would you go so far as to say this is the much talked-about "soft landing"?
BillWol: Our best guess is that it is. However, I also stress that the risks are on the down side. That is to say, there's a much better chance of recession than of a reacceleration of inflation. That's why I expect the Fed to cut rates in August.
JackBW: SFlower12 has a risk question.
Question: Even if there is no recession, haven't the markets factored that in? Is an additional 5% of return worth the risk of investing for the rest of the year?
JeffBW: What are you going to do? Sit out the year and come back in January? I think the market is planning on recession. So if there isn't one, you may get some nice upside surprises in corporate earnings.
BillWol: I agree with Jeff. You can't time the market as finely as your question suggests.
JeffBW: Amen.
JackBW: Aside from Mexico and Japan, which we've discussed, what about overseas?
Question: Are there still good investment opportunities outside the U.S.?
BillWol: Now it's my turn to advertise. Plug into the parts of our midyear outlook issue that deal with international stocks. There are plenty of good ideas there. There's an even more extensive list in the international edition, which you can find right here where you are, on AOL.
JackBW: JONDUDE2 is back.
Question: What is the best investment to put money into now and have liquid in two to three years with no penalties?
JeffBW: A two- to three-year Treasury note is a pretty good deal.
BillWol: The obvious answer is buy a Treasury security. Tell Jack that editors don't always disagree.
JeffBW: If you're in a high tax bracket, you may opt for a short-term muni- bond fund.
JackBW: An interesting question from Tnjr, assuming Glass-Steagall is ever repealed.
Question: If the banking laws are reformed, will we see banks make bids on large brokerage companies, such as PWJ, LEH, or DWD [PaineWebber, Lehman Bros., Dean Witter Discover]?
BillWol: They should only be so smart.
JeffBW: Possible. A few banks might think they're smart enough to play Wall Street. But many so-called smart people lost their shirts in that business. Look at Prudential, American Express...
JackBW: We used to have an editor who said bankers were supposed to be safe, not smart.
JackBW: Jeff, here's a question you can easily answer.
Question: What do you think of the Morningstar reports on mutual funds?
JeffBW: They're the best! What I like is they never stop trying to improve them.
JackBW: BW uses them. They're the basis for the BW Mutual Fund Scoreboards and for Jeff's book.
JackBW: How about this for a final question?
Question: If the flat tax or USA tax is passed by Congress, what will this do to the muni-bond market?
JeffBW: Good question. The muni market has underperformed Treasuries this year just for that reason. If everybody were taxed at, say, 17%, and munis were still exempt, muni yields would have to rise considerably to make up the gap. The only way for that to happen on existing bonds is that their prices would fall.
BillWol: I add one point. A flat tax is far from certain, much as Business Week has editorialized in favor of its own version of the flat tax. So if muni prices fall enough in anticipation, munis may be a good buy in the sense that investors are overreacting to the risk that a flat tax will be passed.
JackBW: On that note, we have to close for tonight. Thanks, Bill and Jeff.
BillWol: Thanks, Jack and Jeff.
JeffBW: Goodnight Jack, goodnight Bill.
OnlineHost: Thanks to Bill Wolman and Jeff Laderman of Business Week and to all the BW Online team for this conference on where to invest. And thanks to all of you on AOL -- with apologies to those whose questions we didn't have time for. If you'd like to continue the discussion, we invite you to move to the BW Online Chat Room or post comments and questions on the BW Online Message Boards (try the Economics & Finance category). Transcripts of all BW Online conferences are available soon after the event (look under Talk, Special Events, or Search BW).
Join us here in BW Online on Monday, June 12, for a conference on innovations in MBA education with Dean John Rau of the Indiana B-school (9pm ET, Bowl) and on Tuesday, June 13, for a discussion of family issues in the workplace with consultant Fran Rogers (8pm ET, Coliseum). Plus, of course, every Sunday at 9pm ET here in the Globe. Thanks again and goodnight!
Copyright 1995 by the McGraw-Hill Companies, Inc. All rights reserved.
