INVESTING -- "The Economy Will Stay Sluggish"
Tuesday July 17, 9:10 am Eastern Time
BusinessWeek Online
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PERSONAL INVESTING
Interviewed by Jack Dierdorff and Amey Stone
The economy and the stock market still have a long wait before a real recovery, despite occasional rallies in stocks triggered by favorable earnings reports, says William Wolman, chief economist of BusinessWeek.
The chief problem, according to Wolman, is that corporate capital spending is still low, especially in technology, while interest rate cuts have the most influence on autos and housing -- two industries that have been doing so well they have little more room to grow.
Wolman also sees global deflation as a much bigger worry than inflation. Considering these factors, he suggests that investors put renewed emphasis on stocks that pay good dividends, and that financial stocks -- regional banks in particular -- would be a haven during deflation.
These were among the insights Wolman shared as a guest in a chat July 12 presented by BusinessWeek Online on America Online. He was responding to questions from Jack Dierdorff and Amey Stone of BW Online and from the audience. Edited excerpts from this chat follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Bill, it was a rousing day for stocks. Could this possibly be the start of something big?
A: My own guess is that however wonderful the day may have been, I don't believe this is the beginning of a major rally. There are just too many signs that the economy is proceeding slowly, rather than rapidly, toward recovery. And under those conditions, it will be difficult for profits to make the kinds of gains that will be needed for a major rally.
Q: But you do see signs that the recovery has begun? It seems like there are a lot of mixed signals in the economic numbers lately.
A: There are always mixed signals in the numbers. The reason the economy is in trouble is that capital spending, particularly by the tech sector, has been extremely weak, and as of yet has shown no signs of turning around. There's still a lot of excess capacity throughout the goods-producing economy, and it will be a while before it is taken up.
In addition, Europe has turned weak, and Asia is in some cases in acute difficulty. Taiwan, for example, really seems to be sinking into recession. The U.S. is also hampered by the extremely high dollar, which makes imports cheap and exports expensive for the countries that buy U.S. goods. So I'm on the bearish side on these things.
In economics, the majority is almost always wrong. Few economists saw how strong the economy would be in the second half of the 1990s. Similarly, they don't realize that the George Jr. economy will have the same characteristics as the George Sr. economy. Like father, like son. Father's economy grew extremely slowly, and my concern is that the son's economy will behave the same way.
Q: Was today just investors seizing on a few snippets of better earnings news?
A: My sense is that there were substantial fears on the Street of a severe slide in the economy. And the earnings figures from Microsoft and GE that came out today were reassuring.
For what it's worth, I never thought that the economy was sliding severely -- it's just that we're entering a period of relatively slow growth. That will be the market's problem for some time to come.... The Nasdaq would have to rise by 20% per year for the next five years to achieve the highs recorded in the spring of 2000. Those kinds of numbers should be sobering, and suggest to me that we'll have a considerable period of subnormal returns in the stock market.
Q: Is there a ``best'' sector to be in when a long-term slowdown is occurring?
A: That is an excellent question. My own view is not to seek the best sector, but rather...to seek companies which have extremely good prospects of raising dividends over the coming years.
I believe that dividends will come back in style, particularly since I think that some people have been shaken up by the fact that some companies, like Corning, have eliminated their dividend. I like high-dividend stocks in the environment that I foresee for the next few years. That's because I believe that dividends will be a more important component of the total return to stocks than they were in the 1990s.
Q: I think the Fed can't do much to help the economy by lowering interest rates. What do you think, Bill?
A: That's an interesting idea. Normally, the economy has responded to Fed cuts in rates. The problem this time is that the sectors that are most sensitive to interest-rate declines are already running at very high levels, and therefore it's hard to see them expand. Those sectors, of course, are housing and autos -- and especially housing. The numbers are now showing that refinancing activity has slowed since the Fed's last two rate cuts. I find that very consistent with the notion that the economy will stay sluggish for quite a while.
Q: Whom do you side with, Jeremy Siegel [a finance professor at the University of Pennsylvania's Wharton School] or Robert Shiller [a Yale University economist]?
A: You have sure asked the right question, since they are two of the few people who are really worth listening to on the market. My own view is that Siegel, for whom I have enormous respect, is a little too bullish on the market, and that Shiller is a little too bearish on the market. In my review of his book, I called him not just a bear, but a grizzly. Just call me a koala bear.
Q: Bill, you suggested that stock investors should look at high-dividend stocks -- good idea. But should investors be putting money in stocks at all right now? Would it be better to wait on the sidelines? Or what about bonds as an alternative?
A: My instinct is...that for relatively young people, it still makes sense to put part of your money in stocks because over the long run, you will do O.K. The trick is to stick with it.
One can argue that the proportion to be put in stocks should be relatively low in sluggish periods like the one that I foresee. Also, p-e ratios are still high, despite the fall of the market.... As far as bonds are concerned, I like the Treasury's TiPS, the bonds that give you a real return of about 4% because they are inflation-adjusted, and give you that 4% return in real dollars, no matter what the inflation rate does.
Q: What about inflation? And mining stocks?
A: On inflation, it seems to me that the real threat to the global economy is exactly the opposite: deflation.... This is obviously not an environment in which mining stocks, in general, seem to be a good play.
One other point along these lines, though you haven't asked the question: Beware of the oil complex. There's a lot of capacity around to produce oil at relatively low prices. That's because, although most people don't realize it, oil exploration and drilling have become high-tech industries with high productivity.
Q: What's the best investment in a deflationary spiral?
A: In general, financial stocks will do relatively well, providing that the institutions don't have a lot of bad debt.
Q: So Bill, how do you think George W. is doing? Should he be doing anything different to help boost the economy?
A: I think that policy, both monetary and fiscal, are good right now. And that's the best news around. The thing that I like the best is the tax rebate, for which I'm not sure that W. deserves the credit, but it will help the economy some.
Also, Greenspan may not have behaved perfectly with the benefit of hindsight, but he has made money much easier. That's the good news. The trouble is that we had such a great boom in the late 1990s that it's just going to take time for the excesses to be worked off, even though policy is generally appropriate.
Q: Bill, what do you think of the employment situation? You've seen a lot of ups and downs in the economy in your career. Does this feel to you like we could be heading into a period where unemployment numbers rise significantly?
A: Typically, unemployment continues to rise -- and often to show its most dramatic increases -- after the economy has turned up. So that even if we're close to the bottom, we could see surprisingly sharp rises in the unemployment rate. I do feel that we're close to scraping along the bottom right now, but to repeat: I expect a sluggish recovery.
Q: Can you venture a forecast of where the market will be a year from now? Final question!
A: The S&P 500 will be 3% higher than it is today. |
