2008/2009 Investment Review & Preview : A Roundtable Look Ahead
Thursday, January 01, 2009SUSIE GHARIB: So what's ahead for the stock market and the economy in 2009? I got some answers from three experts: Joe Battipaglia, chief investment officer at Stifel Nicolaus, James Awad, investment strategist at Zephyr Management and Josh Feinman, chief economist for Deutsche Asset Management. I began by asking Josh, will the U.S. economy get worse before it gets better?
JOSH FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: I'm afraid it is likely that it will. The effects of the housing slump, the credit crunch, the loss of confidence will continue to depress economic activity into 2009. I don't think it's going to get better right away. I do see sort of a bottom forming, maybe by the middle of the year into the second half and the economy gradually pulling out with the aid of a loss of fiscal stimulus and monetary stimulus. But I fear that it is going to be a long, tough slog.
GHARIB: Joe, what a horrible year this was for the stock market. In 2009 are we going to go from a bear market to a bull market?
JOE BATTIPAGLIA: CHIEF INVESTMENT OFFICER, STIFEL NICOLAUS: Well, certainly in 2009 risk is being priced appropriately regardless of what asset class you look at, whether it equities, bonds, domestic or foreign stocks. So that's the good news. The issue is how much of a recovery do you get in '09 and how vibrant can it be in 2010. And may own view is that it is going to be a very slow recovery process. So the consumer still needs to retrench, which means a reduced profile for spending. Businesses are over invested so they have got to under invest for a period of time. Consequently market activity is going to be sluggish at best. So it may be a better year than the year before, but it's not going to be a gangbuster kind of recovery.
GHARIB: Jim, what do you think, will stocks recover in 2009?
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: Well, it depend on on what happens with the economy and right now you have to say the momentum on the economy is on the downside. One would expect that ultimately all this stimulus will take effect. But right now people are continuing to rebuild balance sheets, conserve capital. So what I'm afraid of is that the recovery may be is in '010 instead of '09. But make no mistake about it. The minute the market senses that things are not getting any worse, they will then anticipate that it is going to get better and it will start to do better. But I'm afraid that '010 is the recovery and therefore the stock market may not see an appreciation until the back half of '09.
GHARIB: Do you agree with that? That it is going to be 2010. Can you give us a quick update on what we can expect on home prices, oil & gasoline prices and how this is all going to impact consumer spending?
FEIMAN: Sure. I think house prices are going to continue to go down for a while but then I see the foundations for a bottom forming. Housing affordability is starting to improve, lower prices, lower interest rates. They will help to form the bottom. I don't think we are there yet. But when housing does bottom, maybe by the middle of 2009, then maybe the credit markets start to improve further and that forms the foundation for a more meaningful economic recovery later in '09 and into 2010.
BATTIPAGLIA: I want to take the other side of that if I can for a minute. Because the demand side of that equation is what troubles me the most. The public's portfolio has been badly damaged, houses and stocks. They don't have the capital to step into the housing market as in previous cycles. Businesses are in a similar condition in terms of how much supply is already out there, the market can't accommodate more. So what I'm concerned about is that the demand won't be there despite low rates, despite the stimulus. That could be the real challenge in 2009.
AWAD: What that means, Susie, is that -- and I don't disagree with what Joe was saying, but the major delta in the economy, the stimulus is going to come from government. And that means that -- that is the sole source of recovery. That is what we are counting on and hoping that it spreads to the consumer and to business eventually. But it also means that a government recovery is not necessarily to a capitalist the most efficient recovery, so it might be a slower recovery than one that was instituted by the free market.
GHARIB: All right so while investors are waiting for this recovery, what are they supposed to do with their money? Are they supposed to keep it in cash? Are they supposed to take advantage of these bargain prices in the stock market? Where do you put your money, Jim?
AWAD: Right now, you are in that twilight zone where it's too late to sell, too early to buy. So you should keep some cash, preserve capital but I would say what you should be looking to buy are dividend-paying stocks where the dividends are sustainable, since dividends count in a low return environment. And I think the best bounce back in the world economies will be in the emerging economies. So not quite yet because they have a tough time to go, but I think the greater secular growth is over there so you want to own emerging market funds and stocks and also big multinational U.S. companies that are leveraged to that growth.
GHARIB: Joe what advice would you give because in 2008 a lot of people put their money - they felt comfortable putting in Treasuries with no return or gold. Is that strategy going to work in 2009?
BATTIPAGLIA: Broadly speaking, what you've got to do now is find those companies, those municipalities that have the financial wherewithal for the next three years that they don't need to come to the market for capital should this thing prolong itself. Secondly, they need to be able to pay the dividends and pay the interest. I couldn't agree with Jim more on that process. But lastly, I would say the bond market offers the most unique opportunities here. Because you are seeing 15 and 20 percent rates of return on corporate instruments, even if the market is going to recover, in which case these yields will come way down to where the Treasuries are, in which case, your rate of return is the greatest. And in a sequence, I think the bonds recover before the stocks get there. And that means the bond market probably is the better opportunity away from Treasuries in 2009.
GHARIB: Let's talk about the Obama administration. A lot of people are pinning their hopes on President-Elect Obama to revive confidence and to fix the economy. Josh, what do you think is the most important thing that he needs to do?
FEINMAN: I think substantively get a lot of fiscal stimulus out there immediately, tax cuts and spending increases. On the sort of psychological side if he can do it, anything to try and revive hope.
GHARIB: Jim?
AWAD: Well, there is money in the system. And he's going to put more money in the system. He was elected as a man of hope. The key here is to get the money turning over and that is a matter of confidence. So I would say keep giving us hope. Keep going to the American people saying we can get out of this starting with the inauguration speech.
BATTIPAGLIA: I go another way with this. You don't get out of debt by taking on more debt. And you should cut all marginal tax rates permanently to truly stimulate for the long term. That's not part of the current plan. So I discount the value of this plan that is on the table.
GHARIB: We'll see what happens in the year ahead. Meanwhile happy New Year to all of you. Thank you very much, Joe Battipaglia, Jim Awad and Josh Feinman.
