SmartMoney--Pundit News: "The Pundits Continue to Thaw"
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>>>Pundit News
The Pundits Continue to Thaw
By Gerald Burstyn
January 22, 2001
PREDICTABLE ISN'T a word one would associate with market activity over the past six months. So it's gratifying to see that both the leading indexes and pundits who track them have settled down since the beginning of the year.
Witness the research notes released Monday by three of the leading market analysts ranked by SmartMoney.com — Jeffrey Applegate, Ed Hyman and Ed Yardeni. While all three say it's possible that we could be in a recession or soft landing right now, they also are gaining confidence that the worst may be over by spring. That would explain the tentative gains we've had this month and may mean the market is ready for a sustained rebound.
Jeffrey Applegate, the chief investment strategist at Lehman Brothers, issued a note entitled "What If We're Already in a Recession?" In it, he describes how he recently pumped the worst numbers possible into his economic models to prove that, even if we are in a recession, it's nothing to fret over.
Let's assume that it's early 2002, Applegate says, and we have in hand the revised GDP data for both the fourth quarter of 2000 and the first quarter of 2001. It shows definitively that the economy slowed in both quarters, the classic definition of a recession. "Under that scenario," Applegate asks, "what should the stock and bond markets have done in January 2001? Based on our historical studies, the markets should be acting precisely the way they actually have been: The equity market should be going up and the yield curve should be steepening."
It's true that since the S&P 500 hit its bottom of 1275 on Dec. 20, the index is up 7%. And as long-term Treasury yields have fattened, the yield curve has begun to resume its normal upward slope.
Moreover, Applegate says, historically the S&P 500 has led the economy as an indicator by five months. So if Dec. 20 was the market "trough," a recovery should materialize sometime in May.
"Even if we're already in a recession," Applegate posits, "and the Fed has begun to ease aggressively to engineer the recovery, the market bottom is probably already behind us."
Even better news, Applegate says, is that equity returns following market bottoms have been impressive. One-year returns after recessions have averaged 42%, while post-soft landing returns have averaged 31%.
Even Ed Hyman, president of the International Strategy & Investment Group, has turned cautiously optimistic. Though he still believes we may be in the throes of a recession, Hyman notes there's new evidence to suggest that "if the stock market continues to rally, it's possible the slowdown/recession could be close to over."
Mostly, Hyman presents evidence to suggest that the bad news may be getting better. Of the 14 industrial groups that ISI surveys weekly, three (retailers, home builders and auto dealers) reported they're optimistic about their near-term prospects. That leaves 11 sectors that are still bearish in their outlook, Hyman says. But "there is room for hope. It appears that the rate of decline [in corporate sentiment] has slowed."
Hyman is hardly as sanguine as Applegate, however. He notes that there are "new drags" that deserve "special note." One is the prolonged energy crisis in California. According to Hyman, that "could cut 1Q real GDP by as much as -1%." He also remains wary of tech stocks. He predicts that the plunge so far will likely continue to ripple through the sector. As evidence, he points to the 1980 nosedive in the price of oil stocks, which subsequently caused an 85% decline in the number of oil rigs being deployed. "Associated activities always plunge after the share-price bubble bursts," Hyman says. "And there's lots of room for tech to plunge."
As for Deutsche Bank Chief Strategist Ed Yardeni, he's jumped firmly into the bull camp. Since the Federal Reserve cut the federal-funds rate by 50 basis points on Jan. 3, he's been singing hymns of praise to Fed Chairman Alan Greenspan.
Monday's note was no different. By cutting interest rates, Yardeni says, the Fed chairman sent an "unambiguous" message to the markets that "he wants a soft landing for the economy, not a hard one." Dismissing the "doomsters" who say "we over-consumed and over-invested, but now the party is over," Yardeni proclaims. "I say the party is not over until the Fed chairman sings a different song."
Like Applegate, Yardeni says this all means good things come spring. "The first rate cut by the Fed during a monetary easing cycle is almost always bullish for stocks over the next 12 months," Yardeni says. "There is no reason to believe that it will be different this time despite warnings by the usual end-of-world prognosticators that we have sinned and must pay for our excess of the past few years."
Guess we should just add the power to forgive to Alan Greenspan's other credentials.<<< |
