One on One with Simeon Hyman, Equity Strategist at Lehman Private Investment Management
Wednesday, January 02, 2008
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SUSIE GHARIB: Our market guest tonight says the outlook for stocks in 2008 depends on whether or not the U.S. economy slips into a recession. Joining us now to explain, Simeon Hyman, equity strategist at Lehman Private Investment Management. Hi Simeon and happy New Year to you.
SIMEON HYMAN, EQUITY STRATEGIST, LEHMAN PRIVATE INVESTMENT MANAGEMENT: Happy New Year.
GHARIB: So, the economy is key. Talk us through your analysis here.
HYMAN: You know, a lot of the volatility we're seeing is driven by fundamentals. In other words, every day we're waking up and trying to guess whether we're actually going to be in a recession. You know, our view is that it's a binary outcome for stocks, but stocks are cheap enough that even if we do have a recession, you're looking at maybe a flat to down size of 10 percent market, not the kind of 30 percent plus correction that we saw in the beginning of this decade. But that is only about a one in three chance in our view. There's still about a two-thirds chance that we avoid recession and you don't need to avoid a recession by much to have quite robust equity returns in '08. Just 1 1/2 to 2 percent real GDP growth and flat to mildly positive earnings growth could yield some nice double-digit equity returns.
GHARIB: So you're saying that even in a very, very slow economy, the stock market could do pretty well.
HYMAN: No, I think that's right particularly as we do expect some help from the Federal Reserve. If the credit markets had not imploded in the second half of '07, we'd be looking at probably a good one more year of classic late economic expansion cycle bull equity markets. We're just now concerned that that might be truncated a little bit due to the housing and credit situation.
GHARIB: But given the way the market performed at the end of 2007 and the way it started off today, are we in a bear market or the beginning of one?
HYMAN: Again it really depends on whether we're in a recession or not. The unfortunate thing is we don't know if we're in a recession until we're actually through it. It will be reported on a lag basis, but I don't think we're in a bear market yet. There's enough positive signs in the economy and also you keep in mind that companies just didn't really spend money this past cycle like they have in past cycles. Cap ex as a percentage of sales never really recovered in this expansion and so we don't have the capacity overhang that we've had in previous business cycles so even if we have a recession, there's some reasonable odds that it would be a shallow one.
GHARIB: In this kind of environment, what kind of companies do well and what kinds of companies struggle?
HYMAN: I think the key here is to stick with some themes that -- some themes that did work very well in '07 particularly large cap stocks still are the way to go in our view over small cap stocks. They outperform small cap stocks by around 10 percent depending on what index you use. We think that valuation disparity is not gone yet so even if we do edge into a mild recession, large cap stocks will still likely outperform. The other story that worked very well in '07 was the growth story. We think it's time to move a little bit more neutral on that but still not time yet to dive into the deep value and high dividend-yielding plays that many are suggesting. We think more of a neutral stance on style (ph) is warranted.
GHARIB: So Simeon, what is your number one advice to investors starting into 2008?
HYMAN: Frankly the most important thing is to just stick with your program. This is not a time to dramatically sell out your equity positions. Be close to fully invested. If you can take advantage of some of the dislocations in the credit markets, that can be of use too, but really stick to your knitting and don't sell out of your equity positions. You really have to be close to your full long-term allocations in this environment and really tweak your risk exposures around the edges opportunistically in the credit and currency markets.
GHARIB: OK. Good information. Thank you so much for coming on the program.
HYMAN: Thank you.
GHARIB: My guest tonight Simeon Hyman, equity strategist at Lehman Private Investment Management.
