Pundit News
The Pundit Perplex
By Gerald Burstyn
March 1, 2001
IN JANUARY, there was hope.
Greenspan & Co. had lowered interest rates by
a full point — providing liquidity to businesses
and consumers alike — retail sales had
surged, and the Nasdaq had posted an
impressive 12% gain. Things were looking up.
Then came February, the month that ate
Tokyo. It brought us a stern,
rap-on-the-knuckles Federal Reserve, a 22.4%
decline on the Nasdaq (the third worst month
for the index ever) and a bevy of sorry economic
indicators, including climbing unemployment,
slumping consumer confidence, rising
manufacturing costs and a persistent inventory
overhang — among others.
And now it's March, which, in just its first day,
has already seen the market come in like a lion
and go out like a lamb. How's an investor to
cope with all the twists and turns? Fortunately,
there's a group of men and women that
investors can turn to for advice in these
turbulent times — the 12 leading economists
and market strategists we track at
SmartMoney.com.
Or at least it would be fortunate if there were
anything like a consensus among our pundits.
Unfortunately, they can’t seem to agree on
what the future holds: Six are bullish, four are
bearish, two are somewhere in between. Mind
you, all our pundits agree on one thing: Our
economy has clearly fallen into a pothole. The
real disagreement is over how fast it might
climb out — and whether right now is a good
time for investors to jump aboard for the ride.
Ed Kerschner may be our prototypical pundit
for February. The chief market strategist at
UBS Warburg is optimistic that the market will
rebound, but he's also well aware of the current
dangers. The current marketplace is ripe for
investment, he believes, but investors will have
to scale a "Wall of Worry" before the market
can right itself.
Chief among the worry points for Kerschner are
higher energy prices, weak consumer
spending, an inventory quagmire and the
implosion of the dot-com sector. Still, he
suggests it's the wise investor who plants
seeds precisely when the ground looks most
frozen.
Historically, Kerschner wrote in a research note
issued Feb. 25, "those times when investors
were most frightened by political and
macroeconomic problems were precisely the
times when investment opportunity was the
greatest. The current climate of fear creates an
outstanding buying opportunity. Valuations
today are at or near levels reached at the
bottoms of the four prior market pullbacks that have occurred since this bull
market began two decades ago."
The idea that there is good news buried in the bad isn't unique to Kerschner.
Elaine Garzarelli — who famously foresaw the 1987 crash — argues that
stock-market declines should be viewed as a "gift" because the farther the
market
falls the closer it comes to hitting bottom. "We remain bullish and see any
corrections as an opportunity to buy," the chairwoman of Garzarelli Capital wrote
on Feb. 13. In fact, she predicts the S&P 500 will return anywhere from 20% to
40% this year.
Garzarelli would feel a lot happier about the market, though, if some of her fellow
pundits took off their party hats. In her note of Feb. 23, she cites a statistic
showing that some 65.5% of market analysts remain bullish. That’s "surprisingly
high," she says, and indicates that a rash of pessimism might do the market
some good. "We hope to see our sentiment indicator become more bearish."
Thomas Galvin won’t be much help there. True, the chief equity strategist at
Credit
Suisse First Boston recently pulled in his horns a bit, reducing his 2001
earnings-per-share forecast for the Standard & Poor's 500 to $59.50 (from $61)
and his 2001 price target for the index number to 1520 (from 1600). But Galvin
remains unabashedly bullish about the market’s prospects.
"We are confident that the first quarter of 2001 will prove the bottom for stocks,"
wrote Galvin on Feb. 22. "The pace of the recovery may have been delayed, but
by
no means is now the time to head for the exits. Get Bullish!!"
"Bullish" doesn’t rhyme with Biggs. Barton, that is, chief global strategist at
Morgan Stanley Dean Witter. If Galvin is Papa Christmas, Biggs is most certainly
the Grinch. Biggs remains incredulous that anyone could expect that "the longest
boom in history can come to an end without weeping, wailing and gnashing of
the
teeth."
"Everyone chants don’t fight the Fed, the economic recovery will be V-shaped,"
wrote Biggs on Feb. 20. "[But] I am increasingly convinced the recovery will be
U-shaped at best. I am also convinced that following a momentum strategy is
kaput for the time being. Rotation and whipsaws are ubiquitous and deadly."
His colleague at Morgan, chief equity strategist Byron Wien, isn’t much more
cheerful. "The stock market is facing problems that will keep it from making
much
upside," wrote Wien on Feb. 20, citing weak capital spending and an excess in
manufacturing capacity. "Too many people think the Fed is your friend and that
there is nothing to worry about with the Fed easing." He adds: "When everyone
stops worrying, I get concerned. Over the next several months I expect the
recession to become longer and possibly deeper."
David Jones, the chief economist at Aubrey G. Lanston, is a good example of our
fence-sitters. While he believes a recession can be "narrowly avoided," he does
expect that the economy’s recovery will be "more painstaking and gradual than
generally expected."
Jones pins the economy’s comeback on consumer and business confidence.
Referring to surveys showing that consumers are more fearful of the future than
the present, Jones says the economy will have a fighting chance at recovery if
consumers' "worst fears are not realized."
"The bad news is that if confidence continues to crumble, consumers could be
prompted to cut spending enough to transform the fear of a recession into
reality,"
Jones wrote on Feb. 23. "In this regard, Fed officials must pay especially close
attention to signs of any further weakening in consumer confidence and
spending,
and to counter this weakness with a sufficient number of additional easing
moves
to break the negative psychology and lay the groundwork for recovery." Like most
other pundits on our panel, Jones expects the Fed’s Open Market Committee to
lower interest rates by half a point at its March 20 meeting.
So take your pick. Either the Fed's magic bullet will pull the economy and the
markets out of their tailspin, or the Greenspan Gang are a pack of
behind-the-curve fumblers wielding an ineffectual weapon. Thank goodness we
have the experts to tell us which is the case.
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