NEW YORK - The golden era of economic and stock market growth has halted temporarily, according to panelists on Pensions & Investments' Investment Outlook Roundtable.
The gross domestic product of the economy will grow 3% or less next year, down from a 5.6% rate in the second quarter of this year. As a result, the rate of growth of corporate earnings will also slow, and stock market returns will be in the single digits, the panel said. The good news is inflation is not likely to be a major concern.
In addition, the panel agreed that midcap and large-cap stocks would continue to lead the way, with midcap doing better than large cap. Technology, they also agreed, will continue to provide investment opportunities, but investors will have to select the right stocks in the right sectors of the technology arena.
The panelists were:
* Nicholas Bratt, managing director and director of global portfolio management, Scudder Kemper Investments, New York, which manages $269 billion in total assets and $167 billion in tax-exempt assets.;
* Michelle Clayman, managing partner and chief investment officer, New Amsterdam Partners, New York, which manages $1.1 billion in assets, all of it tax exempt;
* Steve Dalton, chief executive officer, ForeFront Capital Advisors, Philadelphia, which manages $1.4 billion, all of it tax exempt;
* Sheila Hartnett-Devlin, executive vice president and chairman of the global investment committee, Fiduciary Trust Co. International, New York, which oversees $49.4 billion in total assets and $34.3 billion in tax-exempt assets; and
* George Jacobsen, chief investment officer, Trevor, Stewart, Burton & Jacobsen, New York, which manages $756 million in total assets, $516 million of it tax exempt.
The brake producing the economic slowdown, the panelists said, was the slowdown in consumer spending.
According to Mr. Bratt, in the past few years the roles of the stock market and the broader economy have been reversed, with the stock market driving the economy rather than being driven by economic growth. The stock market's weakness of recent months, he said, is not a good sign for economic growth in coming months.
ForeFront's Mr. Dalton noted that consumers have been harmed by the stock market's decline, especially the decline of the dot-com stocks, and Mr. Bratt agreed the wealth effect should not be minimized.
Fiduciary Trust's Ms. Hartnett-Devlin added that the oil price increase was a tax on consumers that also would affect their spending and thus economic growth; and Trevor, Stewart's Mr. Jacobsen noted that, because of the federal budget surplus, "fiscal drag is enormous right now."
While the panel projected only a slowing in economic growth, Scudder's Mr. Bratt noted the high levels of private debt in the economy and the already high levels of bankruptcies. "The bond market would appear to be telling us that maybe we're going to have a hard landing. The equity market is suggesting we're going to have a soft landing. ... I have a sense that maybe the bond market may be right this time."
Mr. Jacobsen agreed: "I think we're getting pretty close to ... a recession." He also was pessimistic about inflation. "I think inflation is probably going to be more of a surprise on the upside. I think that because a moderate decline in consumer demand, with consumers being such a large percentage of the total economy, is going to start to damage the productivity increases we've seen."
As a result, Mr. Jacobsen sees single-digit returns in the U.S. equity market at best, and "it's a toss up whether it's positive or negative."
New Amsterdam Partners' Ms. Clayman disagreed, saying that while the year might start off slow, "I think next year will be a decent year with high single-digit returns. ... I'd say about 9% or so."
Not fragile, delicate
Mr. Bratt said he expected U.S. equity returns next year to be in the range of 2% to 8%, while Ms. Hartnett-Devlin projected a return of 8%, and Mr. Dalton predicted a range of 8% to 10%, "but beneath that you're going to have a lot of turmoil. At least some sectors that will boom and be up 30% top 50%, and other sectors that will be down that much."
The panel agreed that small-cap stocks were unlikely to be performance leaders in 2001. Mr. Dalton noted small-cap stocks tend to do better in an expanding economy, not in a difficult one. "The liquidity issue is still with us," he said.
Mr. Bratt and Ms. Hartnett-Devlin thought European markets were likely to do better than the U.S. market in 2001. Mr. Bratt also thought China and Russia would show strong economic growth next year, but Russia poses some difficulties for investors. Korea should benefit from China's strong economic growth, he said.
Mr. Jacobsen warned that the situation in the emerging markets was "not fragile, but delicate in a lot of places." Mr. Dalton noted that it's only been two years since the Asian crisis, and "two years is not nearly long enough to fix some of the problems."