"I'm as bullish as I've ever been," Kerschner exulted recently. "The
market by every gauge I use is ridiculously cheap. This is one of the five best
buying opportunities I have seen in the past 20 years. "
*****************
Partied Out?
Once the bull shakes his year 2000 hangover, he'll be back for
more
By Lauren R. Rublin
Call it what you will: Y2K or the year 2000, the start of a new millennium
or, to be precise, the final gasp of the old. It seems only fitting, however you
label it, that the year just ended should mark a sharp break with tradition.
Quite a few traditions, it turns out.
For the first time in more than a century, America's quadrennial presidential
contest produced a bumper crop of pundits and parodists, but no clear
winner. The longest-running economic expansion in U.S. history stumbled on
the heels of a half-dozen interest-rate increases orchestrated by the Federal
Reserve. Dormant oil prices not only awakened but soared above $30 a
barrel, taking a big bite out of consumers' wallets and corporations' profits.
And, across the ocean, a fractious Europe finally united behind a common
currency, only to see its value head due south.
But, for investors, the conflation of these unwelcome developments produced
the cruelest reversal of all. The U.S. stock market snapped a five-year skein
of double-digit gains, ending 2000 with a big black eye and, yes, double-digit
losses. "The market was up more than 20% in each of the past five years,"
says Byron Wien, Morgan Stanley Dean Witter's U.S. strategist. "Most
investors would like that to go on forever, and that was the principal affliction
of 2000."
In short, misbegotten expectations of endless growth clashed with the reality
of excessive equity valuations, producing one of the market's worst years on
record. Plagued by declines in its newer technology components, not to
mention the disembowelment of ancient stalwarts such as AT&T and Eastman
Kodak, the Dow Jones Industrial Average ended 2000 down 6.2%, to
10,786.85, its poorest performance since 1981. The broader S&P 500 shed
10.1%, to 1320.28, also its worst showing since 1981, though as colleague
Andrew Bary points out on page 17, the market's decline felt worse than it
actually was.
But the Nasdaq Composite, Party Central in the first quarter, and now home
to dozens of bombed-out dot.com stocks, outdid them both in pain and
suffering, sinking 39.3% on the year, and 51%, to 2470.52, from its March
10 peak of 5048.62. That marked the Nasdaq's steepest annual loss in its
29-year history, and a sharp, if not entirely surprising reversal of much of
1999's 85.6% advance.
So, with this mournful litany out of the way, what's on tap for 2001? If Wall
Street's most ebullient strategists are correct in their basic assumptions, the
Federal Reserve first and foremost will engineer a soft landing, or moderate
slowdown, in the U.S. economy, by lowering interest rates sufficiently to
counteract the punitive effect of six rate hikes in the second half of 1999 and
the first part of 2000. Helped by lower oil prices, more belt-tightening at
home and stronger growth overseas, corporate profits will rise by a
still-respectable 7%-10%. And stocks not only will recover fully, but hit fresh
peaks before the year is out.
"We're standing on the threshold of a new environment," says Stuart Freeman,
of A.G. Edwards. "We're moving from peak GDP growth of 8.3% in late
1999 and average growth in the upper 5% range to something in the 3%
region. Earnings growth is declerating from a mid-20% rate early in 2000 to
something slower, in the single digits. The first of these environments is almost
always tough for equities, and the second is almost always friendly."
Stocks should be helped, as well, by Wall Street's fourth-quarter fire sale,
which not only knocked many profitless New Economy issues back into the
single digits, but also slashed prices on hundreds of profitable, creditworthy
Old Economy names.
"The median price/earnings multiple on the S&P 500 is 16, the cheapest in
four years," says Thomas Galvin, U.S. strategist at Credit Suisse First Boston
(which purchased his prior employer, Donaldson Lufkin & Jenrette, last year).
"Expectations have been wound down, and people are bracing for a hard
landing. But it would appear that the engines of liquidity are about to restart,
which makes this a time to be aggressive, not to head for the hills." Galvin
expects the Dow to end the year around 12,650, some 17% above current
levels.
Valuations also tempt Edward Kerschner, who became chief global strategist
at UBS Warburg when it acquired his longtime employer, PaineWebber, last
summer. "I'm as bullish as I've ever been," Kerschner exulted recently. "The
market by every gauge I use is ridiculously cheap. This is one of the five best
buying opportunities I have seen in the past 20 years. |
