JOSEPH J. McALINDEN
Chief investment officer
Morgan Stanley Investment Management
New York
Assets under management: $451 billion
PREDICTIONS
GDP: 3.5%
S&P 500: 1,404
NASDAQ: 2,660
Hot sector: Technology
There's plenty about 2001 for Joseph McAlinden to forget, but he's optimistic about 2002.
Mr. McAlinden believes the U.S. economy - like Morgan Stanley itself - has put the worst behind it and is poised for a rapid recovery next year. (In what Morgan Stanley officials say is a "near miracle," only six of the 3,200 employees working at the World Trade Center on Sept. 11 died.)
"This economy is going to rebound, and do so quickly," Mr. McAlinden said.
He believes the fourth quarter of 2001 was the economy's trough - specifically November. Mr. McAlinden said by early this year, consumers will find they have more money in their pockets than they expected, thanks to a combination of lower interest rates, lower oil prices and residual money from big-ticket vacations that were canceled following the terrorist attacks. Retail stores that cut back on orders late in 2001 expecting consumers to be tight-fisted with their money will find their shelves nearly empty. Factory orders will pick up. Production will rise. Unemployment will even off.
Inflation will be an emerging concern throughout the year. Mr. McAlinden said the Fed's aggressive rate cuts likely will overstimulate the economy. Signs of that will appear late in the year and into 2003. He sees overall inflation this year about 2%, but pressure will start building toward the end of the year. By 2003-'04, inflation could be in the 3% to 4% range, he said. In response, Mr. McAlinden said he expects the Fed to start ratcheting up interest rates. Short-term Treasury rates should remain flat, he said, but long-term rates will be up 50 basis points by midyear.
Mr. McAlinden is looking ahead to better times for equities, too. Following the terrorist attacks, equity markets hit what Mr. McAlinden called "a major cyclical bottom" in the third week of September. He sees the Standard & Poor's 500 stock index gaining 20% this year, most of that at the beginning. By June 30, he sees the S&P 500 at 1350. Similarly, Mr. McAlinden sees most of the Nasdaq's expected 30% growth happening by midyear, thanks to tech stocks, which he thinks will be the hot sector this year.
In line with his optimism on the technology sector, Mr. McAlinden said he believes growth stocks will outperform value stocks early in the year, but then value will see a resurgence. Small- to midcap stocks will outperform large cap stocks overall in 2002.
As for currency, Mr. McAlinden said the euro is undervalued, and he expects the dollar to weaken against the euro by the second half of 2002. He sees the dollar remaining strong vs. the yen.
