Markets at Midyear 2008 - Experts' Outlook
Friday, July 04, 2008SUSIE GHARIB: So what's the outlook for the economy and the stock market in the second half of 2008? I asked three market experts for their forecast. Hugh Johnson, chairman of Johnson Illington Advisors, David Katz, chief investment officer of Matrix Asset Advisors and Josh Feinman, chief economist at Deutsche Asset Management. I began by asking Josh if the economy is going to grow or stall in the second half.
JOSH FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: I think it grows but pretty sluggishly. The economy still faces some big challenges. It's being hit by three shocks here -- the housing slump, which is ongoing, the credit crunch, which is still with us and high energy prices, and all of those things are going to work as headwinds to sort of retard growth. I think it will still be positive. We saw the strong export sector. We've got some fiscal stimulus and easy monetary policy but it's going to be a struggle.
GHARIB: David, the stock market is now officially in a bear market. How do you see stocks doing in the second half of the year?
DAVID KATZ, CHIEF INVESTMENT OFFICER, MATRIX ASSET ADVISORS: Usually by the time you know it's a bear market you're closer to being out of it. We actually think stocks will do better in the back half of the year. We think that we're in a recession, but we think the recession ends sometime in December, January, February time frame and the stock market should precede that by six months in terms of going up. We're optimistic we actually can get into the plus column for the overall year.
GHARIB: Hugh, I know it's difficult to forecast when a bear market ends, but are you as optimistic as David?
HUGH JOHNSON, CHAIRMAN & CIO, JOHNSON ILLINGTON ADVISORS: If I look at history I can't be as optimistic because the average duration of a bear market is about 16 months and that goes back to 1890. So if David is right, this one is going to be short by comparison to postwar and prewar history. I think he could be right, though and I think the issue is the earnings recession and as soon as we see that we're not going to -- we're going to get out of this earnings recession which started in the third quarter of 2007, when investors believed that we're going to have year-over-year earnings that were positive, then I think that they're going to start to buy stocks and the stock market will do well. My guess, it can only be a guess, is that we'll see that sometime in the third quarter, early fourth quarter that they'll see the end of the earnings recession and the stock market will start to do better. That will be the end of this bear market.
GHARIB: Josh, another really big worry for investors are these record- high oil prices and the impact on consumers, on businesses and on the economy. The forecasts are for $150 a barrel oil, $200 a barrel oil. How do you see the Fed responding to this?
FEINMAN: High oil prices really put the Fed in a bit of a bind because they squeezed purchasing power. They depressed spending for households and businesses but they also push up headline inflation and have the risk of seeping into inflation expectations and into the wage and price structure. It hasn't happened yet, but it's a risk that the Fed is keenly aware of. It's a risk that's certainly going to keep them from cutting interest rates and get them thinking about raising rates. I don't think they're going to raise rates because the economy is still so soft, but it makes the Fed's choice that much tougher.
GHARIB: David, if the Fed does raise interest rates because of worries on inflation, what does that do to the stock market?
KATZ: It puts more of a headwind to the stock market but we actually don't think the Fed is going to raise rates. The economy is still struggling and we think oil prices are in a world of their own so the Fed really can't do too much to affect oil prices.
GHARIB: We've seen, Hugh, this connection between oil prices and stock prices. As oil prices keep going up, do you think the stock prices are going to keep going down?
JOHNSON: I think along with what David has said, if oil prices are going up and the rate of inflation is going up and the interest rates are going up, obviously that's going to be a real problem. That's a headwind for the market and the Federal Reserve responds by raising short-term interest rates. If they get the opportunity to do that, if the economy is strong enough, then absolutely, that's a headwind. It's going to make it difficult for David and I to be right. David says some important things about oil, though. He calls it a speculative bubble at times and I think that he's probably right on that. If I really crunch the numbers, if I look at global supply and demand conditions, oil should be around $83 per barrel, so at some point there will be an event and we're going to break this bubble and the price of oil is going to come down and if that happens, if oil comes down, the dollar stabilizes and attracts capital to our financial markets, David and I are going to look like pessimists, not optimists.
GHARIB: Let's talk about housing prices. Josh, you referred to that in the very beginning about the problems in the housing market. Do you see the housing situation turning around in 2008?
FEINMAN: Not really turning around but maybe bottoming out. Activity bottoms, starts have been cut very aggressively. I think maybe we're going to get some bottoming there later this year. And prices have fallen quite a bit. I think a little bit further fall is likely to bring them into alignment with fundamentals, but then maybe some bottoming, but I do not look for any sharp snapbacks.
GHARIB: David, Hugh was talking about an earnings recession. Do you see earnings in the second half giving any lift to stocks?
KATZ: We don't think earnings are going to pick up in the second half and we don't think that gives a lift to stocks. If you look at the last 50 or 60 years though, stocks generally can do well when you have a flat-to-down earnings environment. So we don't think that's going to be the key factor in determining stock prices. We think at some point before the year's out, people are going to start to look toward 2009. It's going to be a better economy, better earnings, stocks are going to go up before that.
GHARIB: All right. Talk about 2009, got to talk about the elections, who's going to be the next president. Which candidate do you think is going to be best for the stock market and the economy, John McCain or Barack Obama? Josh?
FEINMAN: First, I think Obama is most likely going to win, that's what the futures market suggests, anything could happen but I think he's the clear favorite and I think that he has some policies that might be not so friendly to Wall Street. Somewhat higher taxes almost surely, maybe some trade protectionist stuff. So it's a bit negative but I think we need to keep in mind, even if McCain wins, we're going to have a Democratic Congress and there is going to be some pressure for higher taxes.
GHARIB: David, what do you think?
KATZ: McCain's policies on taxes and on trade are both better for the economy and ultimately would be better for the stock market.
GHARIB: Hugh, where do you stand? JOHNSON: Pretty clear to me that McCain would be better for investors, better for the stock market and Wall Street is going to embrace him and you can't underestimate how important the 15 percent tax rate on dividends, 15 percent tax rate on capital gains, how important that is, how getting rid of the alternative minimum tax which is a McCain policy is -- how important that is. The important thing, though, will be trade policy and McCain is obviously much more on the free-trade side. Obama's trying to get on the free-trade side but he has reservations, wants to renegotiate NAFTA. I think quite clearly McCain is better for investors, better for the market and Wall Street will embrace him.
GHARIB: Gentlemen, thank you so much, Hugh Johnson, Josh Feinman and David Katz and happy fourth of July.
