SmartMoney--Pundit Predictions for 2001--------->
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>>>Pundit Predictions
By Stacey L. Bradford
WONDERING WHAT'S in store for investors during 2001? More volatility, that's for sure. Just how worrisome this may be depends on whom you listen to. Below, we have compiled a list of year-end price targets for the major indexes, compliments of some of the best minds on Wall Street.
Market Predictions for 2001
DJIA S&P 500 Nasdaq
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Jeffrey Applegate 13000 1675 4600
Joseph Battipaglia 12700 1650 4300
Abby Joseph Cohen 13000 1650 n/a
Thomas Galvin 12650 1600 4000
Edward Kerschner n/a 1715 n/a
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Cloudy Crystal Balls
By Stacey L. Bradford
December 29, 2000
IT FINALLY HAPPENED. Goldman Sachs's Abby Joseph Cohen was wrong. The queen of the bull market saw her crown tarnished this year after she predicted that stocks would continue to set new highs. Instead, the major indices are all down — the Dow Jones Industrial Average by more than 6%, the Standard & Poor's 500 by more than 10%, and the Nasdaq by a whopping 39%, for the Composite's worst yearly performance ever.
Abby was by no means the only one to get it wrong in this year of investing dangerously. So did almost all of her fellow bulls — the likes of UBS Warburg's Ed Kerschner, Donaldson Lufkin & Jenrette's Thomas Galvin and Gruntal's Joseph Battipaglia.
But there is one exception. The year's laurels go to Morgan Stanley Dean Witter's Byron Wien. After timing the market well in 1999, when he called for a summer dip, he started off this year a bit cautious. He was expecting a flat year at best for equities, and started advising his clients to lighten up on technology holdings. Then, back in May, he took his year-end Nasdaq price target down to 2500 to 3000 (with the low end of his range turning out to be exactly on target). Meanwhile, most of Wall Street's big brains were still expecting record returns as recently as the fall. Up until October, for example, Battipaglia was still holding out for the Composite to reach 5500. Even his revised estimate of 4300 proved far too bold.
Thanks to Wien's prescient calls this year, he has moved up three notches — to third place — in our rankings. These cumulative batting averages look back at the accuracy of each pundit's calls spanning more than three years. Because the market caught so many gurus by surprise in 2000, however, we've also produced a separate ranking for this year only, which you can see above. And on this obviously more volatile list, Wien's ominous growlings have captured first place.
Bearishness also won Wien's colleague Barton Biggs a high ranking on our one-year list, where he came in at No. 3. Biggs remained bearish all year and continues to think many technology companies are overvalued. (Wien won a higher place on the list because he earned extra points for his more specific calls.) Meanwhile, bulls like Cohen and Battipaglia came in at a lowly seventh and 11th, respectively, for the year. Because of her long-term accuracy in prior years, however, Cohen remains our No. 1 pundit in the cumulative list.
The only other truly bearish pundit, ISI Group's Ed Hyman, also offered investors some useful insights this year. He began worrying about U.S. economic growth back in December of 1999. He may have been a little early, but he was alone in pointing out reasons investors should be on guard for more of a rough landing or even a recession. (He continues, by the way, to think the odds of a recession are increasing.) He also warned that consumer spending was running ahead of income growth and said that this gap would eventually close — and not because income growth would catch up. Right again. Consumer-spending growth recently fell to its lowest level in two years. For 2000, Hyman ranks in second place; he's fourth in our cumulative poll.
So how did all of our other gurus miss the mark? For the most part, they ignored the noise from the market and stuck with their computer models, which continued to scream Buy. These programs take a fundamental approach to investing: They're based on earnings projections, interest rates and the outlook for the economy. They don't factor in investor psychology or botched elections. And they certainly didn't forecast the dot-com implosion. These models simply figure out a "fair value" at which the market should trade at any given time. They typically rely on the earnings estimates provided by the industry analysts at the gurus' respective firms. And since those estimates have proved to be almost universally overoptimistic, the models pegged fair value too high.
Of course, some models are better than others. Back in March, Cohen lightened up on technology after her computer program started flashing a warning light. The following day, tech stocks began the precipitous slide that took the Nasdaq down 51% from its March 10 high. This call helped Cohen maintain her top standing in our cumulative rankings.
So what do the prognosticators see in their crystal balls for next year?
Now that technology stocks are trading at less lofty levels, Cohen finds them attractive once again. She says there are some terrific values for investors willing to tiptoe back into the market. Incidentally, she also likes small-cap stocks, which she says have been neglected for too long.
But at least one of our pundits appears to have been left gun-shy by this year's reversal of fortune. Prudential Securities' techie Ralph Acampora says this is the first time he hasn't been able to publish a yearly forecast. At the moment, he says, he can predict only what will happen during the first quarter. He's waiting to see if the Federal Reserve eases rates and sends investors some relief. In the meantime, he expects stocks will rally into the new year, but questions whether those gains will be sustainable.
Wien thinks not. He says the stock market could continue to fall as we enter 2001. He does, however, believe that we'll eventually eke out a 10% gain for next year. And if you want to do better, focus on value stocks, he says. He likes energy, distressed retailers and financials.
Wien's fellow Morgan Stanleyite Biggs remains bearish. He sees a recession coming our way. He recommends that investors buy bonds and economically insensitive sectors such as health care, utilities, consumer staples, energy and the less-credit-sensitive parts of the financial-services sector.
And how about Cohen's fellow bulls? They remain optimistic. UBS Warburg's Ed Kerschner, for example, sees no reason to change his forecast just because stock prices are down. If anything, it only gives him more reason to recommend that his clients jump in. He says we haven't seen a buying opportunity this attractive in two years. Kerschner expects the S&P 500 to hit 1715 over the next 12 months and recommends picking up shares of the established blue-chip technology companies. (For more predictions from SmartMoney.com's pundits click here.)
It's possible that this year was just an interruption of the longest-running bull market ever. If that's the case, the Cohens and Kerschners of Wall Street will redeem themselves next year. On the other hand, if they're as wrong in 2001 as they were in 2000, we'll really have to start wondering just where they picked up those crystal balls of theirs.<<<
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Abby Cohen
By Stacey L. Bradford
Predictions
· Cohen believes the next 12 months will be a better environment for stocks. She expects the S&P 500 to trade at 1650 by year-end 2001. (Goldman Sachs Research, Dec. 18)
· She's particularly bullish on smaller-cap stocks. "The outperformance of the larger-cap securities has exceeded the differences in the fundamental performance of the underlying companies," Cohen says. "As a consequence, the relative valuation of the smaller issues is attractive and we believe sets the stage for solid price appreciation." Cohen also expects investors to revisit previously neglected areas of the market. This too should benefit the small-cap to midcap stocks. (Goldman Sachs Research, Dec. 6)
· "Two preconditions are now in place for higher securities prices; attractive valuation and ample liquidity," Cohen says. Although she does not pick stocks herself, Cohen says smart stock-picking will be vital next year. "Careful stock selection, in both the equity and the corporate-debt markets, will be the key to strong relative and absolute portfolio performance in 2001." (Goldman Sachs Research, Dec. 13)
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Elaine Garzarelli
By Stacey L. Bradford
Predictions
· Garzarelli says the market is undervalued by 10% based on her estimates for 2001 earnings. "If earnings surprises are on the upside and/or interest rates decline further, the S&P 500 would be even more undervalued," she says. (Garzarelli Capital Management Research, December)
· By early next year Garzarelli expects the Federal Reserve to lower interest rates. She points out that the fed-funds futures market is already pricing in a quarter point easing at each of the January and March meetings. (Garzarelli Capital Management Research, December)
· What sectors does Garzarelli like for next year? Her favorites include auto parts and equipment, consumer finance, diversified health care, hotels and apparel. She believes the last group could outperform the S&P 500 by 64%. (Garzarelli Capital Management Research, December)
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Edward Yardeni
By Stacey L. Bradford
Predictions
· Yardeni expects stock prices to revert to historical growth rates. "The 1990s — particularly the second half of the decade — was a unique period," he says. "The returns in the stock market were extraordinarily high. They are likely to be much more ordinary during the present decade." He expects stocks to appreciate on average 7% to 10% a year. By year-end 2001, he expects the S&P 500 to trade at 1533, the Dow Jones Industrial Average to hit 11943 and the Nasdaq to reach 3000. "The S&P 500 index would double by 2010 using the 7% outlook and triple using 10%." (Deutsche Banc Alex. Brown Research, Dec. 18)
· "I remain a deflationist," Yardeni says. "I expect that inflation will range between zero and 2% per year, on average, through the end of the decade." He also expects that the 10-year government bond yield will fall from 5.2% currently to 4.8% next year and 4.5% in 2002. (Deutsche Banc Alex. Brown Research, Dec. 18)
· Looking ahead, Yardeni expects high-quality and high-yield bonds to perform well under a Bush administration — if the Fed averts a recession. "Similarly, interest rate-sensitive stocks should win, but investors need to be convinced that credit problems won't worsen for financial institutions," he says. "Fed easing should help to relieve these concerns."
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Edward Kerschner
By Stacey L. Bradford
Predictions
· Kerschner is very optimistic about 2001. He sees the S&P 500 jumping nearly 30% by the end of the year, when he expects the index to hit 1715. Stocks have fallen so far during 2000 that we are looking at one of the five most attractive buying opportunities of the past five years, he says. (UBS Warburg Research, Dec. 9)
· But expect more volatility during 2001. "The information age has brought all information to all," he says. "The 'cost' of the instant dissemination of information is the tendency to act first and think second. The quantification of the cost may be the increase in volatility, as even a minor bit of information elicits a major reaction." (UBS Warburg Research, Dec. 9)
· "Very selective buying of new economy stocks with real profitability prospects may be in order," Kerschner says. "Established big-cap tech stocks are at extreme levels of undervaluation." (UBS Warburg Research, Dec. 9)
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Byron Wien
By Stacey L. Bradford
Predictions
· "It's a tricky time to pick sectors; it's better to focus on individual stocks where earnings prospects remain strong," Wien says. "With that caveat, I would focus on energy, distressed retailers and financials at this time. (Morgan Stanley Dean Witter Research, Dec. 4)
· Wien says the stock market could continue to fall into 2001. But by the end of the year we should see a return of normal rates of appreciation in the area of 10%. (Morgan Stanley Dean Witter Research, Dec. 4)
· "I believe the shift from growth to value has much further to go," Wien says. While there will be some opportunities in the technology sector next year, it's probably still too early to buy most of these companies, he says. (Morgan Stanley Dean Witter Research, Dec. 4)
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Edward Hyman
By Stacey L. Bradford
Predictions
· Hyman sees an economic slowdown coming our way. He says the odds of a mild recession are 30%. Odds of a severe recession are 10%. Should we see a severe tech-related capital-expenditure correction or a sustained negative wealth effect, the odds of harsh recession will increase. (ISI Group Research, Dec. 26)
· "We may have already seen most of the carnage to tech stocks, but the slowdown in tech activity is just getting started, and could get as weak as the stocks have been," Hyman says. (ISI Group Research, Dec. 26)
· "We are in the midst of a synchronized global rough landing," Hyman says. "If it turns into a synchronized global recession, it will be the first since 1974." (ISI Group Research, Dec. 26)
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David Jones
By Stacey L. Bradford
Predictions
· Jones believes we will see a series of rate cuts next year starting at the January Fed meeting. He expects the Federal Open Market Committee to ease three or four times until the fed-funds rate sits at 5.5%. (Aubrey G. Lanston Commentary, Dec. 19)
· Don't count out the possibility of a rate cut between meetings, either. Should the Fed be bombarded with weak economic data, Jones says it could ease rates before the January 30 to 31 meeting. (Aubrey G. Lanston Commentary, Dec. 19)
· Jones sees the economy slowing down to 2.5% GDP growth in 2001, about half the rate of 2000. However, he still believes we are in for a soft landing and not a recession. (Aubrey G. Lanston Commentary, Dec. 19)
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Ralph Acampora
By Stacey L. Bradford
Predictions
· So far it's too early to state with any conviction that a major bottom is in place for technology stocks, Acampora says — although he does think we have seen the worst for the Dow Jones Industrial Average. He recommends investors use any weakness to buy value stocks and any strength to unload unwanted technology companies. (SmartMoney.com Interview, Dec. 27)
· Acampora expects stocks to rally during the beginning of 2001. The sustainability of that rally is questionable, he says. It all depends on the Federal Reserve. "We need to see a definitive move on the part of the Fed," he says. At the moment, he recommends that investors stick with value stocks in the chemical, paper and aluminum sectors. Regional banks also look attractive. (SmartMoney.com Interview, Dec. 27)
· "The big question these days is: 'Will Greenspan drop rates sooner and will it be a bigger cut than just 25 basis points?'" asks Acampora. "We suspect that he will cut sooner [before the end of January], but by how much is still debatable. Therefore, expect some kind of recovery, but a sustainable advance must have the support of the Fed. Hence, a very volatile market is expected in the next couple of months. Be very careful. Stay only with value stocks." (Prudential Securities Research, Dec. 26)
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Barton Biggs
By Stacey L. Bradford
Predictions
· "Today, the make-or-break judgment for the coming year is whether the economic landing for the U.S. and the world will be hard or soft," Biggs says. "I think it will be hard, but not a crash landing. In fact, the U.S. economy may already be in a recession. But whether it is or not, a recession is coming, and I am convinced that asset, country and sector selections should be based on this overarching assumption." (Morgan Stanley Dean Witter Research, Dec. 4)
· "I expect value to beat growth, and eventually, small caps and midcaps to beat large caps," Biggs says. "It will be crucial for investors to adapt to the new world. The old Japanese proverb is applicable: 'Obey the customs of the village you enter.'" (Morgan Stanley Dean Witter Research, Dec. 4)
· "In this hard-landing environment, economically insensitive sectors will continue to prosper despite the runs they have already had," Biggs says. "Health care, utilities, consumer staples, energy, and the less-credit-sensitive parts of the financial-services sectors are the places to be, in both America and Europe." Biggs is also very bullish on high-grade bonds. (Morgan Stanley Dean Witter Research, Dec. 4)
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Joseph Battipaglia
By Stacey L. Bradford
Predictions<?b>
· Battipaglia expects the stock market to rebound off its lows in 2001. He figures the Dow Jones Industrials will hit 12700, the S&P 500 will climb to 1650 and the Nasdaq should jump to 4300 over the next 12 months. (Gruntal Research, Dec. 18)
· We are now in an oversold position, Battipaglia believes. Expectations for the stock market and corporate profits are too low. He expects plenty of upside surprises that should boost investor confidence and equities. (SmartMoney.com Interview, Dec. 18)
· "With multiples already compressed in many cases, I expect to see better relative performance by technology companies in the weeks and months ahead as tired expectations are re-energized by surprisingly good results," Battipaglia says. (Gruntal Research, Dec. 11)
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Jeffrey Applegate
By Stacey L. Bradford
Predictions
· "Our S&P 500 price target is 1675; the Dow Jones Industrials equivalent is 13000. For the year, annual expected returns are 21% for stocks, 8% for our bond portfolio and 6% cash," Applegate says. "Our asset allocation is unchanged at 80% stocks, 20% bonds and 0% cash." (Lehman Brothers Research, Dec. 18)
· "In terms of equity style, we expect that growth [stocks] will outperform value in 2001, reversing the underperformance this year." (Lehman Brothers Research, Dec. 18)
· "We are also assuming price/earnings multiple expansion one year from now, as the market trades back to fair value, or a forward P/E of above 25 as compared to below 22 now," Applegate says. Should the Federal Reserve ease, the P/E will be even higher and the stock market will do better, he says. (Lehman Brothers Research, Dec. 18)
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Thomas Galvin
By Stacey L. Bradford
Predictions
· Galvin expects the stock market to rocket ahead in 2001. "The S&P 500 and the Dow Industrials should rise about 20% and the Nasdaq an astonishing 50%," Galvin says. He expects the S&P 500 to trade at 1600, the Dow industrials to hit 12650 and the Nasdaq to reach 4000. "As the Fed provides liquidity, those sectors most battered by the credit crunch like tech, telecom and financials will be greatest beneficiaries as spreads reverse course and tighten, liquidity premiums will fall and P/E multiples will expand." (Credit Suisse First Boston Research, Dec. 18)
· Galvin's favorite sectors include: technology, health care, financials and telecom. As for his top stock picks, he likes Nokia (NOK), Applied Micro Circuits (AMCC), Celestica (CLS), Allegiance Telecom (ALGX) and Morgan Stanley Dean Witter (MWD). He advises investors stay away from consumer staples, energy and utilities. (Credit Suisse First Boston Research, Dec. 18)
· Galvin says inflation should drop significantly during 2001 to below 2%. As this happens, the Federal Reserve could ease rates by 75 basis points by the end of June. (Credit Suisse First Boston Research, Dec. 18)<<< |
