Prospects of a bull or a 4-year sideways market....
Views points from two sides....
Investors want to ask me one single question all the time: Is the present run a beginning of a new bull market, or is it going to be a sideways market for the next few years? I thought, to search the best answer, I will listen to what street pundits and leaders are talking about nowadays.
Those who see a silver lining to the clouds
On May 15, Tyson, dean of the Haas School of Business at UC Berkeley, former national economic adviser to former President Clinton and board member of about 800 companies, came to talk about the old New Economy. Once a month, always on a Tuesday for highly secret reasons, a small group of mostly interesting people gathers at Ming's restaurant in Palo Alto, California for the Silicon Forum. It's a discussion group organized by Auren Hoffman, CEO of Bridgepath.
The real question of course is: When will this damn non-recession-but-nasty-slowdown in technology end?
A light up ahead?
Despite the increasing pessimism of economists, there was actually a surprising bit of optimism among this crowd. It's a buzz I am just starting to hear from the tech set. My old pal Ellen Hancock, CEO of Exodus (EXDS) said she's starting to see some old customers return to her Web hosting business. At my table discussion, people seemed to see more light than dark now. Still, Auren found the people at his table to be more pessimistic. Maybe those folks were still trying to raise funding.
Tyson didn't want to make any predictions, but noted that the optimists are seeing a recovery by the end of the year. However, she also said that this is the fastest and most severe slowdown we've ever seen. One hopes that means a fast recovery as well.
Tyson did point to some good signs: Investment in equipment is at a post World War II high. Half of that is investment in IT, which means IT spending has accounted for 20 percent to 25 percent of the growth in the economy in recent years. She does not believe that we will enter into a Japan-like economic flu.
We have more policy and tax options, plus a budget surplus (for now) that can help prevent it. She believes that the measured productivity increase since 1995 is real, and the decline in Q1 this year was merely a blip. Unemployment and inflation are still low, and huge segments of the economy, such as health care, have not been affected yet.
On the other hand, she noted that this year has brought us negative growth in IT spending, after all that nice speedy increase. We could have a couple of slow years, she said, although we'll emerge stronger in the end.
The energy crisis could have an appalling effect on California. Some economists actually express more pessimism about the California economy than the national economy because of our energy shortage and inflation-inducing prices. Hey, aren't we supposed to be leading the way?
She also deflated the idea that President Bush's tax plan will help stimulate the economy. Tax cut benefits take a while to trickle into the economy. By the time taxes are cut, we may already be on our way out of the doldrums. "One hundred billion worth of the tax cuts will come into effect when they're no longer needed" to stimulate the economy, she said.
Getting people to buy again
It seems to me that consumer psychology plays a huge role in the recovery, and that's something we cannot predict very well. Tyson talked about the "wealth effect." Until last year, a hell of a lot of people felt very wealthy, if not healthy or wise.
They spent and borrowed money against their wealth and put it into the economy. Wages have held up, but Nasdaq's decline makes everyone feel much poorer and more cautious. When the public will feel confident enough to hit the malls again is anyone's guess. Mine is before Christmas.
Most of the 10 people at my table were also surprisingly optimistic, although they were clearly worried about the energy crisis thing. My old pal Bill Reichert, president of Garage.com, seems to feel that the VC community is still spending at high levels historically, and that the best companies are getting funded.
Most of the dead meat in their portfolios has been fed to the vultures, and they should start some real investing again after they return from summer vacation.
It may be wishful thinking, but the inside word for today seems to be recovery. Keep an eye out for more signs.
The other view point is from Michael McDonald, vice president of investments at Salomon Smith Barney and author of a book called "A Strategic Guide to the Coming Roller Coaster Market," isn't so sure about that.
McDonald, who's been an investment professional for more than three decades, said market conditions now remind him of conditions in the late 1960s, when, after an initial drop, stocks began to drift sideways for several years as the 20-year post-World War II stock boom lost momentum.
Just as the recent share-price downturn was preceded by a flurry of speculation in dotcoms and other tech-related stocks, the mid '60s -- when the post-War bull market was on its last legs -- saw investors place almost unshakable confidence in nascent electronics plays. "Any time you have a period where you have excessive speculation by the public in the stock market, along with extreme bullish sentiment and talk of a 'new era,' that's a sign of the end of any long-term bull market," said McDonald.
McDonald said the hallmark of the sideways market he sees developing now is a gradual transition from high volatility to low volatility. "In other words," he said, "the rapid up and down movements of the last year, will, in another year and a half or two years, be followed by 2 percent up, 2 percent down -- I mean just nothing." And that nothingness, McDonald said, could characterize the stock market for another four years or so.
That prompts the question of how investors are supposed to make money in an atmosphere so inimical to "buy and hold" investing -- an especially critical consideration for investor who are approaching retirement. "The only way to get money out of the market is to do trading -- that terrible, evil word, but it's been with us for 200 years. It just takes a lot more skill."
And, though McDonald thinks that that increased onus on financial savvy will dampen public enthusiasm for stocks, he said investors needn't lose faith in equities altogether.
"Back in the late '70s, people said stocks were dead, right before the greatest 20-year bull market in our generation, then they said stocks were the greatest, they want to put Social Security into stocks – you see how the pendulum swings?" said McDonald. "Well, both of those ideas were cock-eyed. Stocks are a fine investment if you diversify, and, over the long term, they do very well." |
