It's Time to Sell Tech
By Stacey L. Bradford
December 24, 2003
This is the third in our series examining the market predictions of some of Wall Street's top pundits.
Who: Tobias Levkovich
Title: U.S. Institutional Equity Strategist
Company: Smith Barney
Quote
"A good economy plus good earnings doesn't equal good stock-market performance."
Market Target for 2004
S&P 500: 1025
Dow Jones Industrial Average: 9750.
Stock Picking
Buy cyclical stocks and small caps during the first half of the year, Levkovich says. During the second half, investors should turn their attention to more defensive companies within the pharmaceutical and consumer-staples sectors.
Avoid technology stocks. The sector is quite expensive. The Nasdaq is up more than 75% from its 2002 lows.
Favorite economic indicator: The earnings-revision trend, published by Thomson Financial. Right now, the trend is healthy, but not excessive, Levkovich says. "We are watching for a major spike," he says.
2004 Outlook
The party's over. That is, if Smith Barney's Tobias Levkovich has it right again this year. After accurately calling 2003's tech-led rally, Levkovich now says there isn't much room for stocks to post significant gains. While equities will probably continue to climb higher during the first part of the year, investors had better be ready to part with some of their gains by summer. By year-end, he anticipates the S&P 500 will close at 1025, 50 points lower than his 2003 year-end target of 1075. According to his calculations, the market could fall nearly 5%.
"The near-term rally will continue, but over the course of the year we will see some pull back," Levkovich says. "Nothing disastrous."
The good news is that Levkovich, who's at the top of his game, firmly believes the economic recovery is here to stay. Corporate profits should continue to swell in 2004 — albeit not at the same frenetic pace of 2003. And gross-domestic-product growth is projected to come in at 4.6%. Trouble is, you need more than a good economy and earnings growth to stimulate stocks.
Consider recent history. In 1984 and 1994, GDP growth increased 2.6% and 4.1%, respectively, while corporate profits spiked a whopping 20% each year. Wall Street couldn't have asked for more. And yet the market inched up just 1.4% in 1984 and slipped 1.5% in 1994.
This year, the fear of higher interest rates should dampen returns, he says. Whether or not the Federal Reserve begins raising rates, traders are likely to push the 10-year Treasury higher, and that's sure to weigh on equities and force P/E multiples to contract.
Despite the gloomy outlook, Levkovich isn't turning his back on equities. In fact, he continues to favor them over bonds. But if you want to survive next year, he argues, you will have to practice careful market timing and stock selection.
So what would Levkovich buy? During the first half of the year, he advises, investors should focus on the consumer-discretionary, industrials and financial sectors. And small caps should outperform large-cap stocks, he says.
Come summer, investors will need to get more defensive. He likes traditional industries such as the pharmaceutical makers and consumer-staples firms and thinks large caps should outperform, thanks to a weaker dollar. Investors should also search out dividend-paying companies, since they can improve a portfolio's total return. This is especially important in a year when most investments will be sagging. Just make sure you don't act before the temperature outside starts rising. "Premature defensive positioning could be costly in terms of performance," he says.
The big change for Levkovich is that he's no longer pounding the table for technology stocks. In fact, he thinks they're too rich and should be avoided. Aside from valuation, the semiconductor industry should also see a pickup in capital expenditures. Hooray? Not quite. This could lead to technology-stock-price underperformance, Levkovich fears, as new capacity exerts downward pressure on chip prices and industry margins by late 2004.
Like everyone else, Levkovich worries about terrorism. Despite Saddam Hussein's capture, Levkovich doesn't think the war on terrorism is over. "Indeed, the backing off of the Soviet Union to end the Cuban Missile Crisis may have been considered a win for the home team, but the cold war continued for another 27 years," he wrote in a recent report.
He's also keeping his eye on the mutual-fund scandals. At the moment, at least, New York Attorney General Eliot Spitzer's latest crusade doesn't look as disruptive as the May/June 2002 'crisis of confidence' that sent investors running for cover. As long as the funds can avoid an F label (for fraud) — the scarlet letter of the early 21st century — Levkovich thinks the markets can survive unscathed.
In the meantime, investors need to hunker down and brace themselves for a lackluster year. But let's not forget that the markets did give us quite a Christmas present this past year. With the S&P up nearly 40% and the Nasdaq up another 75% from their 2002 bottoms, we really shouldn't complain
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