In a week that saw the stock market take two sickening dives and then recover, the July 17 guest was William Wolman, chief economist of Business Week, to give his perspective on the market and the economy.
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OnlineHost: Welcome to Business Week Online! The stock market has been gyrating wildly, and here to explain it is William Wolman (Wolmanbw), BW's chief economist. He's also a regular commentator on CNBC TV who has been watching the world's markets -- and economies -- for more than 35 years, mostly for BW. He has also had experience in banking and Wall Street. The moderator is Jack Dierdorff (JackBW), consulting editor of BW Online.
JackBW: Good evening, AOL audience. Welcome, Bill Wolman.
Wolmanbw: Hi, Jack. Hi, everyone. Who's on first?
JackBW: ObieCox in Charlotte, N.C., puts our opening question very punchily.
Question: O.K., so IS it up or down from here?
Wolmanbw: If you're talking about where the market will be on New Year's Day, 1997, the answer is yes. I forecast around last New Year's Day that the market, as measured by the S&P, would be up about 10% in 1996. I see no reason to change the forecast. We are not entering a bear market. What we're doing instead is adjusting to the fact that earnings growth is slower in 1996 than it was in 1995. For a while, this eluded investors, particurly in NASDAQ stocks. They're finally catching on to the idea. They were prompted, of course, by disappointing earnings for some technology stocks -- notably and especially, Motorola and Hewlett-Packard.
JackBW: Here's the next question.
Question: How did the other market indicators do while the Dow was gyrating?
Wolmanbw: Actually, the NASDAQ behaved about the same as the Dow over the past four or five days -- even though most people assumed that it was doing worse. The problem for the NASDAQ, of course, was the fall that occurred in the last part of June. As of today's close, the gains in all three indexes -- the Dow, the NASDAQ, and the S&P -- are about 3%, counting from the beginning of January.
JackBW: Bill, here's a follow-up on the Dow.
Question: Is the Dow really a reliable reflection of the state of the stock markets and of the economy?
Wolmanbw: The general answer is no. The S&P is obviously a better indicator of what the 500 companies with the largest capitalization are doing. The NASDAQ is a far better proxy for technology stocks, although there are some very good, less well known indexes of tech stocks, such as the one compiled by Morgan Stanley and the one compiled by the Pacific Coast Exchange.
JackBW: The Bayard in Bloomfield Hills, Mich., asks this one.
Question: Do you think the IPO fever in technology is one element helping to drive the chaos of the past days?
Wolmanbw: To some extent. But the panic of the past few days, if panic is the right word, affected all stocks, as I just argued.
JackBW: GOSTATE33 asks next.
Question: What do you see out there that could send this market into a tailspin?
JackBW: Anything?
Wolmanbw: The greatest danger to the market is a reacceleration of inflation. Remember, the whole problem was set off with that report of big employment gains on July 5. I happen to think that the report on hourly wage gains -- 9 cents an hour in June -- will be revised downward. But nothing anyone says will totally erase inflation fears in the market -- even, I'll add, if Alan Greenspan says in tomorrow's congressional testimony that inflation worries are exaggerated: Not everyone will be convinced. (But it sure will help.)
JackBW: Rvetovit is up next.
Question: What is your forecast for small-cap stocks for the rest of the year?
Wolmanbw: This is a place where overall forecasts don't mean diddly. There are some very good small-cap stocks, particularly in the technology sector, where the slaughter has been of the innocent -- good companies, as well as the guilty. It's among those that you'll find the winners in technology. Beware of high price-earnings multiples. You'll find to your surprise when you look through the list that high P/Es survived the selloff. But unless I really knew something about the company, I would be reluctant to say that they are justified.
JackBW: Wiredwilly in River Forest, Ill., has a sort of conspiracy theory.
Question: Doesn't "disappointing" really mean the company made a pile of money but not as much as some bad estimators predicted, so all the short sellers can use it as an excuse to drive prices down, then buy again when prices bottom out and make huge profits?
Wolmanbw: I really think that bad earnings forecasts are the result of incompetent analysts doing bad work, rather than the result of a conspiracy by short-sellers. That's particularly true if the analysts work for fairly large institutions -- even brokerage houses.
JackBW: Continuing on profits, from IBD Jim in Los Angeles.
Question: Do you think corporate profits are going to continue to be lackluster?
Wolmanbw: It depends on what you mean by lackluster. The return on equity to American corporations last year was incredibly high -- about 20%, I think, for companies listed on the NYSE. This is not likely to persist. I continue to believe that the market's gains will be modest by the time the year is out, because there is a deceleration in profits growth. It's now occurring, even though companies that are beating earnings estimates outnumber companies reporting a shortfall -- by almost 2 to 1. I'm talking about this month, and the second quarter.
JackBW: Quickkeys sends this question from her keyboard in Boston.
Question: What is your suggestion to someone who has most of their investments in the stock market, as a solo investor (not with a mutual fund)?
Wolmanbw: If you mean individual stocks, BW editors don't make recommendations of particular companies. If you're talking in general and are a young person, dollar-averaging into the stock market will produce very good gains for you. That is true even if you start investing now and the market goes down some more in the short run. Dollar-cost averaging means investing the same amount in the market each month or each quarter. That way, you get more stock when prices are low and less when they are high. It's a poor-man's way of buying cheap and in the end selling dear.
JackBW: Putting it another way, Bill, is this a time to shift investments or even bail out?
Wolmanbw: Thanks for that question, Jack. Since I don't believe that we're in a new bear marekt, I would not bail out at this point. Remember, experience shows that it's incredibly hard to time the market.
JackBW: GOSTATE33 puts you in the Fed chairman's shoes for a minute.
Question: If you were Greenspan, what would your message be tomorrow?
Wolmanbw: If I were Greenspan, I would say that concern about inflation can easily be overdone. That's because the productivity growth in the economy is very strong, foreign competition is very intense, and monetary policy -- while not tight -- is not easy. I would congratulate the Clinton Administration on getting the budget deficit down to 1.6% of the GDP, the lowest in the industrial world, and would say that this is good insurance against inflation. I would also say that I will tighten money only if I become convinced that inflation is a clear and present danger.
JackBW: SaucyKat has a variation on the question I asked a minute ago.
Question: Do you agree that the market is in for even more corrections? And that a wise investor will put the majority of his/her money into cash rather than in stocks?
Wolmanbw: I think that the market will be volatile -- in the next few months, especially. I would therefore be very cautious about taking positions in stocks in hopes of selling them for a higher price a few weeks or months later. But, to repeat again, a weak market is a help to someone who dollar- averages and uses the stock market to achieve long-term investment goals, such as retirement, paying for education, and maybe even a trip around the world five years hence.
JackBW: JMorrisSD in San Diego has the next question.
Question: Bill, do you anticipate a number of stocks being revalued in the market? It seems multiples of quality growth stocks (i.e., Coca-Cola) are still extreme. KO's multiple is over two times its growth rate.
Wolmanbw: Yes. I have argued that what happened in the stock market over the past couple of weeks is an adjustment to the recognition that earnings growth is slowing. So unless I had a really incredible story about a company I knew extremely well that justifies a super P/E, I would be very careful about high P/E stocks.
JackBW: RATV in Irving, Tex., is next at bat for you, Bill.
Question: What is your recommendation for someone with strong investments in mutual funds in the technology sector?
Wolmanbw: Hang in. As you well know, technology stocks have come down almost 20% from their highs. There have been a lot of good earnings reports to offset the bad news at companies like H-P, Motorola, and Texas Instruments. So as a group, I suspect that tech stocks will do O.K. between now and yearend. I would , as I said, hang in.
JackBW: MSTRASS07 moves outside the U.S. with the next one.
Question: Is this the right time to move to international markets?
Wolmanbw: As far as I'm concerned, it's always the right time to put some of your money into mutual funds that invest in the emerging world. We're seeing growth rates of 6% to 10% in many countries -- from China to Chile, from Indonesia to Argentina -- and this is likely to continue. At the same time, the prospects, if we're lucky, are for about 2.5% growth in the U.S. and in the Common Market countries. Over the long run, the money will be made in fast-growing countries, so that 10 years from now you'll be very happy indeed with a diversified portfolio of emerging-ountry stocks, even though there could be rocky patches on the road.
JackBW: A longer-term question about technology stocks from SPEMS next.
Question: If you have a substantial portion of your portfolio (60%) in high techs, could you be in trouble for the next three to five years, or is this enough time to be O.K.?
Wolmanbw: It's probably enough time to be O.K. I just hope that the investment is not in high techs with crazy P/Es. One other point: My instinct is that we will have consolidation in many high-tech areas over the next decade -- Just as we had in other industries, such as autos, in the 1920s. So I happen to like some big companies that are the likely winners. So while I won't pick stocks, I'll mention a couple of big companies like Microsoft and Intel.
JackBW: BCMimers has an even longer-term question.
Question: I am a 48-year-old teacher with a retirement benefit that will pay about $35,000 a year after 33 years. I will retire at age 62. How much do I need to have in mutual funds to live comfortably in retirement?
JackBW: Depends on the definition of comfort.
Wolmanbw: It's hard to do arithmetic on the screen, but if you get 7% on your money -- a good conservative forecast -- and want to double your income, just divide X (the amount you want) by .07, and you've got it.
JackBW: MF Dogwind (a veterinarian in the San Francisco Bay area) asks this one.
Question: I believe you have had many negative opinions about the valuations of many Internet stocks. Do you feel valuations are now more in line?
Wolmanbw: You're forcing me to comment on stocks, but you have the right general idea of my thinking, yes. Despite the fall in recent weeks in the price of many of these stocks, I'm still worried about overvaluation.
JackBW: Moving now from stocks to bonds...
Question: Do you still feel the long bond will end the year at lower yields than we have today? Or have you changed your forecast?
Wolmanbw: No, I haven't changed my forecast. I think it is significant that during the period the stock market dived (the last couple of weeks) the yield on the long bond fell by about 20 basis points. Which, of course, is another way of saying that bond prices went up. I am comfortable with my forecast that the long rate will be closer to 6% than to 7% by yearend. But as you well know, that is not a widely shared opinion.
JackBW: SLKK1 wonders about a sort of bottom-fishing expedition.
Question: Wouldn't you consider quality companies (i.e., stable profits in today's environment) that have experienced price reductions of 30% during the current correction to be bargains that could produce sizable gains over the next six months?
Wolmanbw: My guess is that this would be a good strategy. If you want to get back in the market or commit new funds, it's a good idea.
JackBW: Try this next.
Question: Are Intel's profits a sign of a recovery for technology stocks generally?
Wolmanbw: My guess is that the answer is no, if what you mean is that profits growth for the technology sector will match what happened last year. It's important that this morning after Intel conducted a conference call with analysts, some investment houses, including Goldman Sachs, reduced their earnings expectations for Intel's third and fourth quarters. That is to say that even though Intel beat expectations in the second quarter, the analysts have some concerns about the rest of the year, based on their interview with an Intel executive. That is not to say that Intel's a bad company or about to suffer serious problems. It's just a warning -- but it is a warning -- that profits growth in the technology sector is slowing.
JackBW: You've already said you didn't expect a dramatic decline. But try this question anyway.
Question: If we're in for more declines on the Dow, what sectors might be safe havens for investors wanting to sit it out?
Wolmanbw: Given my expectations, I like the financial sector, particularly banks. I also like utilities, many of which are becoming much more lively as businesses and will benefit from the decline in rates that I foresee. Utility stocks did take a hit over the past couple of weeeks, but before that were performing surprisingly well. I expect that surprisingly good performance to resume.
JackBW: An area you haven't touched on yet.
Question: What about the commodity markets?
Wolmanbw: One reason that the stock market seems to have stabilized yesterday is that commodity prices fell. The CRB index, for example, actually dropped by three points on Tuesday -- which is a big number. And it fell again today. So I would be cautious about commodities. There are some plays in agriculture, with a bad corn crop, and so on. But I'm not the one to help you decide whether there's any upside left.
JackBW: How's your crystal ball for the economy and Nov. 5, Bill?
Question: How do you see the market and the economy affecting the Presidential election in November?
Wolmanbw: History shows that the rate of growth of real disposable income in the second quarter of election years is the best single indicator of who will win the Presidential election. Unfortunately for the Republicans, that number will turn out to be very strong, which bodes well for Bill Clinton -- even if the economy slows in the second half, as I suspect it will.
JackBW: Our time is up, I'm afraid. Thanks, Bill Wolman of Business Week for your discussion of the stock market today -- and tomorrow.
Wolmanbw: Thanks, Jack -- and thanks to everyone on AOL.
JackBW: Thanks to the AOL audience for all the questions. Transcripts of this and all BW Online conferences are available soon after the event. Look under Talk & Conferences from our opening screen. Thanks again and goodnight, all!
Copyright 1996 by The McGraw-Hill Companies, Inc. All rights reserved.
