What Lies Ahead?

The professional future-tellers, the highly respected economists and analysts who have been glamorized in recent years by CNBC, CNN, and Bloomberg News all fall in a pretty tight range saying that markets should grow about 8-10% this year, the economy should grow about 3.5% and corporate earnings, about 10%. 

That of course wouldn’t be bad; it’s about what happened in 2004.  Those experts on the low end of the range point out the negatives and uncertainties including the Middle East unrest, the weak dollar, a Federal Reserve, fearing inflation, raising rates too high and so on.

Harold Gold of Barron’s writes an article that poses some positive potential outcomes that might make for a really great year.  The experts he quotes suggest that oil might fall from current levels reducing drag on the economy.  The dollar’s decline may be nearing an end, reducing worries that foreign investment inU.S.assets could be at risk.  Finally, businesses might begin to spend some of the cash they are hoarding.  According to S&P’s chief investment strategist Sam Stovall there is some $600 billion on the books of companies in the S&P 500.  Increased corporate spending might continue to boost hiring which would sustain consumer spending, the most significant portion of the economy.

We believe there will be opportunities in 2005, but likely not as widespread as they were in the second half of 2004.  Emerging markets in Latin America and Asi awill likely continue to provide the best returns in 2005, as they did in 2004.  Energy should continue it’s out performance, even if oil prices fall to or below $40.00 per barrel. China and India’s appetite for oil may slow, but the global dynamics for oil prices are forever changed and it is increasingly difficult to find and to draw from the ground.

Capital spending will likely increase in technology this year.  We think some areas of information technology will benefit such as security, services, and internet commerce.  Specific components of wireless communications should also perform well as the industry continues its consolidation.

Interest rates will likely rise in the coming year, mostly on the short end.  There were hints in the minutes of last month’s Federal Reserve meeting (released earlier this week) that they believed inflation pressures were mounting.  Traders believe that at least two more rate increases of .25% each are coming in the next two months.  That likely means that long-term bond rates will stabilize in the months ahead and even fall a bit as the Fed takes a break.  All bets are off if the economy shows faster growth than the 3 – 3.5% expectations.

Big questions remain unanswered on the fiscal policy front.  It appears that Bush is ready to tackle Social Security and to a lesser extent, tax reform.  His budget clearly indicates a significant reigning in of spending is ahead.  As proposals move toward law and regulations the investment risks and opportunities will become more apparent.

The long view continues to be very positive for stocks.  Interest rates are low and the relative return that stocks offer has rarely been higher.  In my 25 years in the business of watching trends, one indicator I’ve noticed that never fails is that when you are getting investment advice from the painter, the barber, and the candlestick maker – it’s time to sell those ideas and invest where everyone says opportunities are dead.  It seems everybody’s buying real estate.  It follows then, that at some point ‘everybody’s’ appetite or their ability to buy real estate will end.  When that happens, who will be around to buy when they are ready to sell?

Stocks are nowhere near the screaming buys they have been in years or decades past, but there are some bargains here and abroad.  Will they offer better returns than real estate in the coming years?  I don’t know, but I do think it’s easier to argue thatU.S.real estate values are frothier than stock values.