William Wolman, chief economist of Business Week, was the Dec. 22 guest of BW Online to discuss the investment outlook for 1997 -- the subject of the Dec. 30 yearend double issue of the magazine.
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OnlineHost: Welcome to Business Week Online! Where should you invest in 1997? That's the topic of BW's yearend double issue, just out, and here to talk about it tonight is the magazine's chief economist, William Wolman. You might also know him as a regular commentator on CNBC. The moderator is Jack Dierdorff (JackBW) of BW Online. And now on to Bill Wolman and your investment questions.
JackBW: Good evening to all of you on AOL. Hi, Bill Wolman and welcome.
BillWolman: Hi, Jack. Hi, everyone. Nice to be here.
JackBW: Bill, here's a question to get us started.
Question: After a sensational year for investors -- at least in stocks -- what kind of investment year can we expect in 1997?
BillWolman: My own suspicion and best guess is that we will have a year in which the broad averages such as the S&P 500 will go up by something like 7% to 8%. If I'm right, it will be a hell of a year -- simply because we've had a rise in the S&P 500 of something like 60% since Thanksgiving of 1994. Any gain at all next year would therefore be remarkable. I do not see a major correction of any duration, simply because I can't see any imbalances in the economy that will create havoc. The great danger to the market -- and Alan Greenspan, chairman of the Fed, was right about this -- is irrational exuberance. So if the market shoots rapidly toward 7000, I'd get scared -- and would demand to come back on AOL to reassess my position.
JackBW: For some reason I like this question from P450Guy for what it says about Bill.
Question: Bill, you are a voice of reason and clarity. Does the economy slow or accelerate next year?
BillWolman: Thanks. My own view at the moment is that the economy is not accelerating now -- that is, in the fourth quarter -- and will not accelerate in the first two quarters of next year. My guess -- and it's boring -- is that the growth rate will come in a little under 2% for this quarter and the next two quarters. I don't want to forecast the second half of next year yet, except to say nothing wild will happen either on the upside or downside.
JackBW: To follow up on P450Guy's question, tackle this one.
Question: The Business Week Investment Outlook uses the phrase "New Economy." What exactly is the New Economy?
BillWolman: The answer to that question is pretty simple: The New Economy is one of rapid technological advance, particularly in the information economy, of globalization, and of price stability.
JackBW: UP60 sent us this question in advance -- for which, thanks, UP60.
Question: Is there a propensity for deflation in this New Economy? The consensus at present seems to be for a continuation of the low level of inflation we have been seeing for many years now.
BillWolman: Amen, UP60. I certainly agree with that -- agree that the level of inflation will continue to be low. Moreover, I'd go further: If there is a risk on the price front, it is of deflation, not of inflation. There's a lot of pressure on the prices of all goods, partly because of a modest slowdown in the developing world, particularly in Asia, and this slowdown is a great incentive for the Chinese, the Koreans, and other Asian countries, including Japan, to cut prices. Look what's happened to the prices of Japanese cars in U.S. markets over the past few months. They've been coming down, putting pressure on Detroit, and increasing Japan's market share. That could be a template for many other areas.
One other point: There is an increasing tendency to ship routine white-collar work -- filling out and checking insurance forms, tending to bank computers, and other things of that kind -- to the Third World, where the cost of doing it is about one-third of what it is in the U.S. That is also a strong deflationary force. So while I think continued low inflation has the highest probability, I do not rule out the possibility of falling prices next year.
JackBW: Another question submitted ahead of time, by Mike Yacyk.
Question: How do you see the outlook for retail stocks? After Christmas, will retailing sales growth continue to accelerate, become stagnant, or decline?
BillWolman: My own view is that there is a lot of hype about this year's Christmas season. There are five fewer shopping days between Thanksgiving and Christmas this year than last -- which means that daily volume in the stores has to average 16% higher per day during the period, just to match last year's sales. I wish retailers good luck, but I think that doing only slightly better than last year is the best they can hope for. Also, there are many signs that auto sales are lower this December than they were in November, and by all accounts the sales of PCs are somewhat less than robust. So I would temper my enthusiasm for retail stocks -- if I had any to begin with.
JackBW: Now -- and about time -- to questions from right now. This one's from RexC10133.
Question: Mr. Wolman, how do you see transportation stocks doing in '97? I am interested in Conrail and CSX.
BillWolman: It seems almost certain that CSX will get Conrail, even though Norfolk Southern is a damn good railroad as well. I think the stock of an expanded CSX represents an investment in a very strong company, which will now be able to reach into the Northeast in a way it couldn't before. So while I don't recommend individual stocks, I can say that CSX is a sound company.
JackBW: Elbatoloco, from just off I-5 (California, Oregon, or Washington?) sends us this one.
Question: Mr. Wolman, what do you think of entertainment software companies for the next year and beyond? Are they worth the risk?
BillWolman: Good question. I'm far more certain about the long run than the short run. And in the long run, a basket of entertainment software stocks will probably prove richly rewarding. It is an area where the U.S. has a large edge -- and where the export demand for the product is almost certain to be very strong.
JackBW: Let's pause for a moment for this follow-up comment from P450GUY.
Comment: Bill, you sound a little exuberant! No correction?
BillWolman: Only an idiot would say there's no possible correction. And if you call my forecast of a 7% to 8% rise in the broad indexes exuberant, then I'm exuberant! But I would not call this exuberance -- certainly not irrational exuberance. Let me add: My basic point as an economist is that I don't see any major imbalances in the economy that will really knock it for a loop. I also reiterate that if the market moves rapidly toward 7000 early next year, I'd get scared and would then demand another conference!
JackBW: LngLaker keeps asking us about AOL stock. We must point out that BW can't comment on individual issues. But perhaps, Bill, you have some thoughts on online companies and Internet stocks in general.
Question: What's the prediction for AOL? I heard 80 to 100 a share. Do you think that's accurate?
BillWolman: I really can't comment on AOL's stock.
JackBW: As I said.
BillWolman: On Internet stocks in general, I again reiterate what I said about entertainment stocks -- bullish in the long run, uncertain in the short run, and please diversify into a basket.
JackBW: Next, from TScott2066 in Southern California.
Question: Bill, where do you see interest rates heading in 1997?
BillWolman: Modestly down. Since I think growth will be modest, I see no inflation, and believe that the federal government will do more to cut its deficit, I think there's a good chance that rates can come down. By the way, if you take all units of government, not just the feds, the American public sector ran a surplus, not a deficit, this year. If my memory serves correctly, that surplus was nearly $100 billion.
JackBW: Choctaw123 in Massachusetts has a basic investing question.
Question: Shouldn't a stock investor generally think three to five years?
BillWolman: That depends on what type of stock investor you are. I myself would like to see results in something sooner than three years. I make one important exception -- a Peter Lynch-type exception: If I know the company extremely well and the industry extremely well, I might be willing to be patient.
JackBW: My3Ladies in Peoria, Ariz., is next up for you, Bill Wolman of Business Week.
Question: Where do you see bond funds going for '97?
BillWolman: Answer: Since I believe rates will fall, bond funds, which have fairly long duration, should fare relatively well. The real rate of return on bonds should be very good next year if inflation is as low as I think it's going to be, as the bond story in BW's current Investment Outlook issue correctly argues.
JackBW: Corkat has the next question.
Question: Do you expect the small caps to have a good year in '97?
BillWolman: That's certainly the conventional wisdom. The problem, of course, is that money these days -- that is, fresh money pouring into the market -- is going into index funds. A recent number I saw suggested that a mind-blowing 36% of all 401(k) money is going into the index funds. Which is probably what's making the Dow and the S&P 500 so strong. I note with interest that there is a growing number of index funds for the small-cap sector of the market. As these funds grow in popularity, particularly with 401(k) investors, it will sure be a help to the small-cap sector. It is only realistic to note that every forecast of a small-cap catchup that's been made over the past couple of years has failed to be correct. And that includes forecasts made over the past few weeks.
JackBW: Advice for a newcomer? This comes from SANMI in Virginia.
Question: Do you see investment clubs as a viable option for beginner investors?
BillWolman: Sure. I can remember in my first job -- which was teaching at a "cow" college, then called Washington State College -- some friends of mine and I started an investment club. I learned more then about the market than I've learned since. That may be because as a journalist I cannot invest in individual stocks without risking conflicts of interest.
JackBW: User60784 moves us overseas.
Question: How do you feel about Europe -- and Germany?
BillWolman: The Dax has been strong for the past few weeks, and it does seem to me that Germany has a better chance of doing well next year than does, say, Japan. Again, I shouldn't have to say this, probably, but if you invest in German stocks, be sure that either you know something about them, or that you're invested in a mutual fund run by someone who does.
JackBW: BigJay has this one.
Question: Bill, what's your position on municipal bonds?
BillWolman: I see no reason why muni bonds should not perform relatively well next year, given my general bond market outlook. I don't see any major change in the tax treatment of munis, so they should occupy their usual place on the investment spectrum.
JackBW: RONZCOMP turns us to the telecom industry.
Question: What is your opinion of the Baby Bell stocks for 1997, since they did relatively poorly this year?
BillWolman: I think my answer to that question is my nervous-in-the-short-run, bullish-in-the-long-run assessment. The facts are that access to homes with phone lines and other devices to make widely switchable contact with others is still fairly difficult to come by. The Bells still have an advantage in this area, and it would not surprise me if their run of bad luck and bad news turned around sometime next year, or the year after.
JackBW: LOBooe in Lonoke, Ark., takes us outside the U.S. again.
Question: What is your economic outlook for the foreign markets in '97? Do you think they will be superior to our markets in the U.S.?
BillWolman: There are many people who think so, simply because the U.S. market has outperformed the European market and the Japanese market over the past couple of years. My own position is that most investors should have some investment in the countries of the emerging world. The reason is simply that even when they're growing slowly, many of these countries grow at 6% a year, and if we grow fast, the U.S. grows at 3% a year. This is an environment in which it makes sense to invest in the fast-growers. That is the way money is made.
To end with a remark that may be totally irrelevant: I take it most of you know that the Russian stock market has so far had the largest gains of any market in the world this year -- something like 133%. That doesn't say it won't collapse in the next few days. But it is an indication that there is tremendous potential in countries that are still early on the road to market capitalism.
JackBW: Corkat is back to reveal himself as one of your CNBC fans. Bill's there six days a week.
Question: You are the only person that I really pay attention to from CNBC. In your opinion, do you see the Dow at 7000 next year? What do you see for the Nasdaq?
BillWolman: The answer is that I'm much more comfortable with about 6700 to 6800 on the Dow. I'm not going to do a level of the Nasdaq. But I don't think it'll do better than the Dow for '97. And thanks for the compliment!
JackBW: MW0203 in Sioux City, Iowa, shares an investment goal with many people out there.
Question: What is my best chance for a good return on retirement money? I have 15 to 20 years left and don't want to be working odd jobs just to make ends meet.
BillWolman: The answer is simple: If you really do have that long a horizon, dollar average into stocks. I would put at least 15% of my investment funds into stocks of companies in countries in the emerging world, using a very good mutual fund to do so. Although the market is high right now, and is subject to correction sooner or later, if you dollar average into the market the corrections or correction will simply be an opportunity to buy more stock for the same number of dollars.
I have no real doubt that this approach, which has worked well for the past 100 years, will continue to work well. Dollar averaging simply means investing the same number of dollars in the market each month or quarter. Obviously, this can't be a rigid rule, since if your income grows, you'll probably want to invest more over time. But if you have a long time horizon, DO NOT dump your money into the market in one big bundle. It's a risk you don't have to take.
JackBW: Doug410 in Ohio has another very common investment goal -- and maybe gets a similar answer.
Question: How should I invest for my kids' college fund with only $120 a month to contribute?
BillWolman: Carefully. I can't do compound interest in my head. But if you're young, and still have a decade, say, before your kids go to college, you'd be surprised at how much $120 a month will add up to if you get a return of, say, 9% a year.
JackBW: MJstoble asks about a specific investment vehicle.
Question: Would index funds be a strong bet in 1997?
BillWolman: Based on what happened the past couple of years, the answer is yes. However, I would suggest that if you have a long time horizon, don't look only at index funds for the well-known seasoned issues like the S&P 500. As I said before, more and more index funds run by very good companies are appearing for small-cap stocks. I'd start accumulating some of those now, because I have a feeling that over the next few years they will emerge as heavy hitters.
JackBW: KJkottman puts your acumen to the test here.
Question: O.K., Bill -- I'm a small investor with $20,000 in liquid assets (savings and checking). I'd like to invest it in stocks but fear the "correction" everyone is talking about. Where would you recommend I put this money? I can invest the money for a minimum of five years.
BillWolman: I go back to Sermon No. 1: Don't put the $20,000 into the market all at once. Start dollar averaging into the market and gradually feed it in over the next couple of years. That's no guarantee of success, but it does seem to me that it reduces the risk of making a lump-sum investment when you really can't afford to lose a large part of your money.
JackBW: UP60, who sent us a question ahead of time, is here -- and asks this.
Question: Tangentially, from my initial question on deflation, do you consider the long bond to be a buy at the current quotation?
BillWolman: Yes, recognizing what you could get over the next month or so. But I believe that the real returns on bonds are very good, and the investments will prove successful over, say, a one-year horizon.
JackBW: Another sector is heard from, via Judsadie.
Question: Any comment on bank stocks for '97?
BillWolman: Yes. A stable to falling interest-rate environment is favorable for bank stocks. Also, the merger wave in this industry is far, far from over. Also notice that last week the Federal Reserve increased the proportion of bank holding company assets that can be invested in the securities business. In effect, banks can now become brokers and investment bankers.
JackBW: A global economy question here, in a sense, from JoanIris.
Question: Do you think that the merger between McDonnell Douglas and Boeing will enable them to compete effectively against Airbus?
BillWolman: I don't think it will have much impact on the long-run ability of Boeing to compete. After all, when Boeing bought McDonnell Douglas, it eliminated a competitor to Airbus, just as surely as it eliminated a competitor to Boeing. It seems to me that in the long run Airbus will do very well -- particularly if it can persuade the European countries with a stake in the company to let Airbus reorganize to increase efficiency. I think that the American merger increases the odds that Airbus will get the freedom it needs. What is true about the Boeing-McDonnell merger is that it will give Boeing more capacity in the short run to fill its order backlogs and also to make it more of a player in aerospace and defense.
JackBW: Laffhaha asks a question that has occurred to many of us.
Question: Mr. Wolman, do you think that it is an imbalance when the market grows so much faster than the economy?
BillWolman: That's the irrational exuberance question. And I think the answer to Mr. Greenspan's question is yes. I say, and say again, that if the market comes into '97 like a cannon shot, I want to reexamine my forecast.
JackBW: Dean Giano in Lancaster, Pa., has this question.
Question: What group of stocks do you recommend investing in in '97, and some examples?
JackBW: Can we answer this within our limits?
BillWolman: Can I give a reading notice for Business Week's Where to Invest issue -- the one you'll currently find online?
JackBW: Yes, you surely can.
BillWolman: There are lots of great recommendations by smart people in many New Economy industries, such as high tech, finance, media, etc.; many good ideas of where to look in the emerging markets, and indeed in the global economy generally. I have recenlty been in Chile, and their market actually declined this year. I would not bet against the Chilean market in 1997 -- and probably would bet in favor of it.
JackBW: You'll find the Dec. 30 issue in BW Online -- click on the cover image on the first screen. The AOL keyword is BW. Thanks so much, Bill Wolman, for your insights into where to invest in 1997 -- adding on to what you'll find in the Investment Outlook issue.
BillWolman: Thanks, Jack. And thanks to ALL of you on AOL, for ALL your questions. Good luck! And remember to read this week's cover package!
JackBW: My thanks, too, for the audience questions -- a surfeit of riches tonight! Transcripts of this and all BW Online conferences and chats are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. Thanks again, and goodnight to all!
Copyright 1996 by The McGraw-Hill Companies, Inc. All rights reserved.
