One on One with Jeffrey Kleintop, Chief Investment Strategist at PNC Wealth Management
Tuesday, December 19, 2006
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SUSIE GHARIB: The Dow's record today comes on top of 20 other record closes since October. And our guest tonight tells investors to get ready for more of them in 2007. Joining us now, Jeffrey Kleintop, chief investment strategist at PNC Wealth Management. Hi Jeff.
JEFFREY KLEINTOP, CHIEF INVESTMENT STRATEGIST, PNC WEALTH MANAGEMENT: Hi, Susie.
GHARIB: Before we get into your forecast, let me ask you a little bit about today's market action. A record close on the Dow and that's in spite of pretty bad news on inflation. Tell us what's going on here.
KLEINTOP: Well, yeah, initially, the futures, you know, really sold off and in fact, the market did open a bit lower on that weaker housing and more worrisome inflation data, but you know what, it's the details of the report and the fact that PPI last month declined quite a bit. So it's a little bit of volatility. I think the market was able to look through that and the fact is demand remains very strong for stocks and that overcame any worries about inflation.
GHARIB: And that's why you are very bullish for 2007. Just to share with our viewers, you're predicting 13,400 for the Dow, which is 1,000 points from where we closed today and a record high on the S&P 500 in the New Year. So, what do you think is going to be the key factor that's going to drive those rallies in the New Year?
KLEINTOP: The biggest factor is going to be the expansion of price to earnings ratio. The valuation of the market, what we pay per dollar of earnings. Earnings growth is going to slow next year, probably to the low single digits, but P/Es are going to rise. That's going to drive a lot of the game. Each point that the P/E goes up is worth about 7 percent to stocks. Given the backdrop of a lot of demand for stocks, whether it's corporations through buy-backs, mergers and acquisitions or leveraged buyouts on top of individual investor demand creates a very positive supply and demand dynamic for equities helping to lift them at least through the first two quarters of next year
GHARIB: Your asset allocation is 70 percent which is also pretty bullish. What are you suggesting that investors do with their money? Where should they invest it? Are you talking about large cap, small cap, growth, value?
KLEINTOP: I think large cap looks particularly good next year. As the business cycle matures, you usually see a shift from small caps which always lead in the first half of the cycle to large caps in the second half. Timing that is always the trick. Usually it comes right around the end of when the Fed's rate hikes stop in that mid-cycle environment. So I think we're embarking on a large cap period of out performance and growth versus value follows a similar pattern. Value stocks tend to do well in the early stages of the business cycle. They're more cyclical as the economy ramps up in terms of its growth and as things begin to slow down, investors tend to look for more growth oriented companies, slower, more stable companies and so we tend to see P/E's rise for those.
GHARIB: All right. So, can you name some names, two of your favorite stocks for long term investors for the New Year.
KLEINTOP: One of my favorite stocks is Goodrich Corporation, ticker symbol GR. I own it. PNC owns it. We recommend it to clients. It supplies aviation equipment, very important. We're in a very strong up- cycle for aerospace, lots of planes being ordered. All kinds of demand around the world as even the emerging markets are expanding and building airports, et cetera. That looks really positive here in the course of the next year. Another stock, Cisco Systems within technology, lots of demand for mobile communication, video on demand becoming more a part of our everyday lives. Cisco is very well positioned for that. I own it, PNC owns it. We recommend that to clients also.
GHARIB: What about international stocks? Are you advising clients to invest in international stocks?
KLEINTOP: We still think international markets look a little bit more attractive even than the U.S. markets do. We have been recommending an overweight there for the past two years and continue to recommend that going into 2007. Slightly better earnings growth, similar valuations, but a backdrop of improving economy, lower -- lower labor costs and perhaps a lower dollar as well, all a big positive for international investors.
GHARIB: All right, speaking of the lower dollar, there are other worries on investors' lists. Of course, higher oil prices, weak housing, inflation. What are the risks to your forecast?
KLEINTOP: Definitely housing falls in there. I'd say, you know, the fact that we're more leveraged to housing as an economy than we have ever been in the past. I'd say the potential for housing to pull the broader economy into recession is probably around 20 percent. That's probably my biggest risk next year. I worry a little bit about inflation and oil prices. I think they're probably going to be headed lower with lower global economic growth next year. I worry a bit more about maybe a dry up of global liquidity like we saw earlier this year when the Bank of Japan ended its process of quantitative easing, supplying less money to the emerging market. That results in a bear market and a 10 percent pullback here in the U.S. I'd worry about something like that next year.
GHARIB: Hate to jump in, but we have run out of time, Jeff. Thank you so much for coming on the program.
KLEINTOP: Thank you.
GHARIB: We really appreciate it.
KLEINTOP: Thanks Susie.
GHARIB: We've been speaking with Jeff Kleintop, chief investment strategist, PNC Wealth Management.
