Points of View: Economists See Darker Future Than Analysts
By KEN BROWN
Staff Reporter of THE WALL STREET JOURNAL
As the stock market gets pounded, two groups of high-profile Wall Street pundits differ starkly on the direction of the market and the economy.
Market strategists, who opine on stocks and their next moves, and economists, who weigh in on things such as interest rates, inflation and economic growth, are acting as if they are living on different planets rather than working for the same firm.
That doesn't do much to help frazzled investors these days. With days like Monday, when the Nasdaq Composite Index dropped 6.28%, investors would like nothing better than to know where the economy and the stock market are going. But where do you turn?
While there are certainly exceptions, economists generally are more pessimistic than strategists. Nowhere is the split more dramatic than at Goldman Sachs, where investment strategist Abby Joseph Cohen raised her recommended stock allocation to 70% from 65% last week, while at the same time the firm's economics team issued a stream of bleak forecasts.
The same day that Ms. Cohen told investors to buy stocks, the economists at Goldman lamented that weak income-tax refunds would keep consumers from spending "at a very unfortunate time, just as businesses and policy makers are relying heavily on a consumption rebound to keep the economy going."
The week before, the economic team's report, "Fed Easing: A Three-Legged Stool With Two Missing," began by saying expectations that lower interest rates would boost growth "stand a high risk of disappointment."
The U.S. economic group, led by Bill Dudley and including Ed McKelvey and John Youngdahl, sees slightly negative earnings growth for the year for the overall stock market, as opposed to Ms. Cohen's forecast of positive 7% for the Standard & Poor's 500 stock index. "I've got my own profit forecast, and it doesn't even have the same sign" as Ms. Cohen's, Mr. McKelvey says in an interview.
Ms. Cohen points out that she uses a different methodology to forecast earnings than the economists, explaining in an interview that the two numbers are not directly comparable. She also says she uses economists' work in her forecasts, but, like other strategists, she must incorporate it into a broad market call.
"What I'm trying to do is to say, if we assume we have the right outlook, is it properly priced into the market," Ms. Cohen says, adding that the S&P 500's nearly 6% fall since her call only makes stocks more attractive. For her part, she calls the current economic slowdown "a cyclical adjustment process that does not reflect on the sound fundamentals of the U.S. economy."
To be sure, you would expect a group of smart people analyzing things as complicated as the economy and the stock market to have different opinions. But the current split is especially wide, and that, many people say, is because the stock market is already way down, while many of the signs of a true economic slowdown -- higher unemployment for one -- haven't shown up.
"The strategists have already gotten their bad news," says Alan Levenson, chief economist at T. Rowe Price and a former UBS Warburg economist, referring to the yearlong stock-market correction. "The economists are saying we know stocks are cheap," but things could get much worse for both the market and the economy.
Underlying the bullishness of most stock-market strategists are two key facts: Lower interest rates are good for stocks, and the stock market tends to react to the future, so stocks should be expected to head up before the economy perks up and corporate earnings start to grow again.
"The strategist is probably responding to considerable historical precedent indicating that share prices tend to do very well when the Fed cuts rates," says Christine Callies, chief U.S. investment strategist at Merrill Lynch, who sees the S&P 500 index rising 38% by year end.
Ms. Callies and Merrill's chief economist, Bruce Steinberg, make an effort to coordinate their work and agree that the market is probably a "buy" right now. But their view of corporate earnings is very different: Mr. Steinberg sees 2001 as a bleak year with earnings declining 2%, while Ms. Callies sees earnings rising 3.7%.
Before Ms. Callies joined Merrill last June, the firm was an oddity because its strategist, Charles Clough, was far more bearish than Mr. Steinberg, one of the more bullish economists. "Chris and I are in more agreement than Chuck and I were," Mr. Steinberg says.
There is still a split at Merrill, though. The firm's chief quantitative strategist, Richard Bernstein, remains a snarling bear. His latest report, published Monday, was titled, "Bulls. More Bulls. And Then There's Rich."
Merrill's chief market analyst, Richard McCabe, has yet another view, believing no short-term rally is near.
"Merrill has four different macro people, and they're all saying something different," says Michael Weiner, a managing director at Banc One Investment Advisors," referring to the firm's three strategists and one economist. Mr. Weiner adds that he likes strategists and economists for their ideas, not their specific recommendations.
At other Wall Street firms such as Lehman Brothers, economists and strategists do sing in harmony, but that is largely because the economists are as bullish as the strategists. "What we're looking for is a pretty good-sized pickup in growth in the second part of the year," Lehman economist Stephen Slifer said on a conference call Monday with the firm's bullish strategist, Jeff Applegate, who sees the market rising 33% by year end.
Another reason economists and strategists disagree is because their audiences tend to be different. Strategists talk to stock-market investors, be they individuals or institutions, who want to hear that economy and market are in fine shape. Economists, whose interest-rate outlooks are widely followed, tend to focus on bond investors, who want to know which way interest rates are moving, and can be quite happy in a slowing economy, particularly when inflation isn't a threat.
T. Rowe Price's Mr. Levenson says it isn't a contradiction for economists and strategists to believe that the economy is in bad shape but that the stock market should do well, especially if they believe all the future bad news is already priced into stocks. "You can have a negative outlook on the economy and a positive outlook on the stock market at the same time," he says. "I do."
Write to Ken Brown at ken.brown@wsj.com |
