Ed Yardeni makes the bull case in the WSJ. John Neff, has the same $55 dollars of earnings for the S&P 500 that Yardeni has.
The Barron's roundtable was exceptionally insightful for the full array of opinions this, We may have to have a look at that this weekend.:
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Wall Street Bull Makes
His Case for Up Market
(from Tuesday's online version)
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, note 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.)
Ed Yardeni
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 |
