What worked well in the fixed-income market in 2002 will do poorly in 2003. And vice versa.
So says Tad Rivelle, who thinks the economy is doing just fine. No believer in a double-dip recession, Mr. Rivelle thinks the economy has been chugging along rather nicely at a 3% annualized clip since Sept. 11, 2001, despite stock and bond market gyrations. "You have capital markets that have basically been pricing in a depression," he said.
In 2002, he said, investors' attitudes careered "from irrational exuberance to an abyss of pessimism," ignoring the economy. In reality, operating earnings are rising, and corporations - while shedding workers - are able to pay those remaining a better wage, he said.
The main drags on the economy have been retrenched business investment and a declining wealth factor from the plunging stock market. Now, excess production capacity, a stabilizing stock market and the continued rise in housing prices will mean a boost in corporate earnings, Mr. Rivelle said.
What's more, a combination of monetary stimulus, fueled by a 1.25% federal funds rate, plus $147 billion in supplemental federal government spending, will juice the economy. And corporations will have to make capital investments to meet consumer demand, he added.
While the fixed-income story for 2002 was about risk aversion, with investors fleeing to safer Treasuries and mortgage-backed securities, the opposite will be true this year, he said. People "will get out of the cave (in which they) have been hiding," Mr. Rivelle said.
That's good news for high-yield and corporate bonds, and bad news for last year's favorite sectors, he said. Right now, investors can double their yield from Treasuries by investing in 10-year Ford Motor Credit bonds. "That's not like taking a walk on the wild side," he added.
Chief investment officer
Metropolitan West Asset Management, Los Angeles
Assets under management: $17 billion
GDP: 2.5% to 3%
Inflation: 2.5% to 2.75%
10-year Treasury: 2.5% to 2.75%
Dollar to yen: 140 to 150
Dollar to euro: $1.10
Shearson Lehman Broad Investment Grade: 0 to 1%
Hot sectors: autos, energy, telecommunications