New Ed Yardeni stuff (WSJ -- Wall Street Bull Makes His Case for up Market).
Wall Street Bull Makes His Case for up Market
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
For investors who have high hopes that Wall Street's two-year-old
market slump will end in 2002, stocks came out of the gate at a
decidedly disappointing limp.
All three major market gauges -- the Dow Jones Industrial Average, the
Nasdaq Composite Index and the Standard & Poor's 500-stock index --
are down so far for the year after falling in January.
The first-month performance alone is usually considered a good
indicator -- based on history and probably a bit of superstition -- of
where stocks will head in the new year.
But exacerbating investors' jitters are the Enron-fueled accounting
maelstrom, mere flickers of an economic recovery and a fear that
corporate profits won't rebound powerfully enough to support stock
prices.
Bulls, however, not[e] that major averages haven't had three consecutive
down years in six decades. And for those losing confidence that the
market will snap its down streak this year, the Wall Street Journal Online
invited a prominent Wall Street bull to restore their faith.
Edward Yardeni, economist and chief investment strategist for Deutsche
Banc Alex. Brown, says he expects the market to gain momentum in the
second half of the year as the 2003 profit picture comes into focus. In
an exclusive interview with the Online Journal, he outlines some of the
reasons for standing his optimistic ground.
Next week, a prominent Wall Street bear will give his side of the story.
(See earnings releases and economic reports scheduled for the coming
week.)
WSJ.com: First of all, what are your
targets for the Dow, Nasdaq and S&P for
this year?
Mr. Yardeni: 11,500 for the Dow, the
Nasdaq is going to be stuck between about
1800 and 2000 through the year's end, and
I could see the S&P going up to 1250.
WSJ.com: That sounds ambitious.
Mr. Yardeni: The year's still young. The market is still focusing on earnings
projections for this year. As we get closer to the year's end, next year's going
to matter a lot more. I wouldn't be surprised if the Dow's still at 10000 at the
middle of the year. Most of the excitement I'm looking for is going to be a
second-half phenomenon. Until then, it's going to be sideways-drifting market.
WSJ.com: But you're still bullish for 2002 as a whole. Did you feel the same way last year, or is this a new
view of Wall Street?
Mr. Yardeni: Last year I was arguing we might not have much of an economic recession, but we would
experience a profit recession, and I felt the Federal Reserve would lower rates. We should be feeling better
about the economy this year, but the market discounted much of the good news already.
I see $55 a share for earnings this year [for the S&P 500]. The market is not overvalued, it's not
undervalued.
WSJ.com: But given the scrutiny about accounting and how that might cause projections and results to
shift, how confident are you in those projections?
Mr. Yardeni: The accounting issue is the flavor of the day. The market has attention-deficit disorder: it can
only focus on one issue at a time. That's where we're focusing right now. I've got to believe that all the
accountants and auditors are going to make sure the first-quarter numbers are squeaky clean.
WSJ.com: Yes, but if the accounting standards tighten, couldn't that make earnings look less appealing?
Mr. Yardeni: That's the bad news, yes, but the quality of earnings will improve. This is a recovery year. If
all this had happened last year when market had been going straight south, the bear market would have been
worse.
Earnings in a recovery year are generally up 20%, 25%. I'm only looking at a 15% to 17% recovery in
earnings.
WSJ.com: Has your asset-allocation recommendation shifted at all since the beginning of the year? I believe
you went into the year with an 80/20 stocks-to-bonds mix, and then shifted that view to 70/30.
Mr. Yardeni: My benchmark is 80/20. I work mostly with institutional money managers, and most are
fully invested. If the market is somewhere between 10% overvalued or 10% undervalued, I want to be at
my benchmark. If it's more overvalued I want to reduce my benchmark. Right now the market is fairly
valued.
But, like everybody else, I have an uncomfortable feeling about earnings and accounting. I want to go
through the first quarter of earnings season in the spring and see what auditors do with first-quarter
numbers, and whether they restate numbers from the past. It may cost me some performance, but I'd
rather get that behind us then go back to the benchmark.
WSJ.com: Investors' optimism, high at the beginning of the year, seems to have faded. What would you
say to investors who are losing faith?
Mr. Yardeni: The lesson in the past few years is that you really do have to be a long-term investors.
We have to realize that, on this planet anyway, getting 20%-30% returns is a very unusual investment
environment. That's what we had in the late '90s, but the late '90s are over. A 10% return in the equity
market is pretty good, and I think it can be accomplished.
WSJ.com: So do you see the latest stock-market dip as a buying opportunity? If so, how would you
recommend an investor enter this market?
Mr. Yardeni: I think it is a buying opportunity, but that's a vantage point of getting it right and retiring in a
year or two.
I think you have to have some investment themes that you believe in and can stick with. For example, for
anyone who's thinking long-return, health care stands out as an area that should benefit from biotechnology
advances and aging baby boomers, on the demand side.
For shorter-term investors, I would continue to play home builders, mortgage lenders, building-supply
retailers, cable companies and consumer electronics.
WSJ.com: Why?
The consumer's in pretty good shape, and the reason for that, is that real take-home pay continues to rise.
While 5% to 6% of labor force may be out of a job, 94% still have one, and thanks to all these incentives
and discounts, their wages are rising faster than prices.
Also, interest rates will remain low, because powerful recessionary forces are still out there, such as the
near basket cases in Japan. That benefits mortgage borrowers. After the Nasdaq bubble bursting, and
September 11, people are viewing their home as an asset, and if nothing else you can enjoy it when you get
home from work.
I also like defense stocks. You're looking for investments where you have some visibility and sales. This is a
congressional election year, and I can't imagine any representatives will want to appear weak on defense.
WSJ.com: What about the valuation issue? The S&P 500 trades at a relatively high [price-to-earnings] ratio
of about 28 based on the previous four quarters, compared with 24 a year ago. Is that a good measure of
the market, or is it a misleading way to value share prices?
Mr. Yardeni: Like everything else, there are different ways to assess these things. I like to look at forward
earnings, consensus forward earnings that come from Thomson Financial/First Call. They survey Wall
Street analysts on a weekly basis, and that's the number I look at. I don't use trailing or current earnings.
The market is a discounting measure. I look forward.
Write to Erin Schulte at erin.schulte@wsj.com
Updated February 16, 2002 11:49 a.m. EST |
