CHICAGO - There was no consensus on the outlook for stock market returns in 1999 among the panelists on Pensions & Investments Investment Outlook Roundtable, who predicted gains ranging from as much as 25% to a more modest 5% to 10%.
The panelists: Alan Bond, chief investment officer, Bluestone Capital LLC (formerly Bond, Procope Capital Management), New York; Loren Hansen, head of equities, Stein Roe & Farnham Inc., Chicago, and Colonial Management Associates, Boston; Louis Holland, chief investment officer, Holland Capital Management, Chicago; James Paulsen, chief investment officer, Norwest Investment Management, Minneapolis; and Eugene Sit, chief investment officer, Sit Investment Associates, Minneapolis.
They met Dec. 2 to discuss the outlook for the economy and the stock and bond markets.
Mr. Bond, who last year predicted the stock market would be up as much as 15% to 20%, again predicted high returns - in the 18% to 25% range. He was joined in predicting high returns - 15% to 18%, by Mr. Paulsen of Norwest.
P&I: Let's talk about the outlook for the U.S. economy in 1999 and then we'll come back to the stock market and the outlook for that. Let's start with you, Jim, on GDP growth rate projections for 1999.
Mr. Paulsen: What is driving real GDP, that is the 31/2% growth rate we've had in the last year, is deflation itself. That's the great stimulator here. It's not the Fed. It's not the Congress. It's deflation, and it's so different from the last 50 years. I would say in the '90s our supply is out ahead and it's dragging demand along by dropping the price to maintain equilibrium.
Deflation is just terribly stimulative through refinancing. The Fed didn't ease at all when Asia hit, but the Asian crisis created a great reliquification because deflation created drops in financing rates and flushed cash flow into the corporations and the housing sector.
Congress didn't pass a tax cut, but Asia did because it dropped the price of oil and other heating bills, and just like a tax cut, it provided subsidies to help ease the use of copper and aluminum, tin scrap, and so forth. We've experienced here in the last three or four years the biggest rise in real purchasing power in the household sector in over 25 years thanks to deflation.
We are now easing - 42 countries around the world have eased in the last eight weeks against a 31/2 real GDP growth rate in the United States, and I think the deal is we could continue to have better growth than expected in real terms. I think real activity is going to stay high, fueled by deflation and pressure. What we're having is a price recession, if anything.
As long as it doesn't get too deep, I think it will be a boom period as opposed to a bust or contraction period, so I would put GDP growth as high 3% next year. I think that the GDP deflator will be in deflation maybe as much as 1% year-over-year by the end of 1999, and the consumer price inflation rate will be very close to zero.
Mr. Holland: I think the GDP number is probably going to be between 1% and 3%. I usually look at the stock market and look at corporate earnings and some of those kinds of things and generally speaking the market tells us that it's probably going to be better. I think to the extent that we have had this dramatic - and I think almost unprecedented - synchronized lowering of interest rates in the last couple of months, the global slowdown or meltdown, as some might call it, clearly has everyone's attention. The U.S. probably will survive recession, meaning we won't have one, and my guess is that we'll do better as we progress through 1999.
P&I: Gene, your views on GDP and inflation?
Mr. Sit: We're in that plain vanilla camp, recognizing we're in the 90th month of expansion, which is one of the longest on record. The consumer is in great shape, the jobs outlook is fine despite Boeing and Exxon and other manufacturing contractions.
The question is: What could change this outlook? And I think disinflation is preferable to deflation. Deflation is when you have declining prices and declining asset value. That has been true for Asia and much of the developing markets. For us in America and for the European economy it is basically disinflation, i.e. slower rises in prices so that what you own - the hard assets - have not really declined in value.
But disinflation has contributed to a rise in your financial asset prices and that has really been the fuel to this very strong economic outlook.
Mr. Hansen: We're in the consensus outlook here too. The 2% percent GDP is a little lower in the front half and a little stronger in the last half. And as for inflation, we're around 2%, a little lower in the front half and maybe a little increase in the second half. I guess if we have any concerns on surprises, it would be that the growth would be faster.
Then we might, one year from today, have some reservations that the great bull run of eight years of disinflation might indeed be over. That's not what we're forecasting but that would be our major concern if things got too strong over too short a period of time.
Mr. Bond: I don't disagree a whole lot. I had the economy a little bit slower in the first half, but I do think that with some of the large mergers that we're witnessing right now that you're going to have a little bit of a fallout in terms of employment in some of the major cities. I just think that once the economy has the opportunity to digest that, we're right on track to continue what would be the ninth year of this great economic expansion despite the global problems that have plagued the world.
P&I: Well, nobody has mentioned the outlook for earnings, which clearly is related to GDP and so forth, so let's go back and ask what you think the corporate earnings are going to look like. Alan?
Mr. Bond: You know, in '96 and '97 we saw corporate earnings growing at about 10%. I don't think we're going to see that in 1999. I think that we have already seen earnings slow a little bit, and I believe that we could see probably about 5% to 8% growth, but that doesn't worry me to a large extent.
I think, again, moderate growth leads toward sustainable types of improvement.
One of the big concerns I have had is that companies just are not able to control the top line. They are not able to raise prices and they are facing competition from a global standpoint where prices are going down and that has just made it very difficult for them to compete.
I think there will be cost efficiencies achieved with a lot of resurgence in merger acquisition activity and so that will enable them to maintain another year of fairly stable growth.
P&I: Loren, are you worried about that?
Mr. Hansen: Well, yes, we're a little more sanguine than that. I'd say we're closer to flat earnings and maybe even a little bit of a decline, weaker in the front half and stronger in the second half. And I guess it would be all the margin squeeze issues that were pointed out here. Obviously, we're coming off a pretty strong base in 1998, and we think flat earnings are going to be okay.