Gene Sit is particularly positive about equities this year, predicting 15% growth for the S&P 500 and 20% for the Nasdaq. Returns for both indexes likely will leap up considerably more if there is a peaceful resolution to the Iraqi situation.
"World peace is good for global economic growth and investor confidence," Mr. Sit said, predicting that removing the uncertainty of war one way or the other will be quickly and perhaps generously rewarded by the market.
Mr. Sit said U.S. economic recovery is still in an early stage and likely will run until mid-2005, "a fairly typical expansion," but not like the long expansions of the 1980s and 1990s.
Inflation will remain virtually flat, hovering in the 2.5% range, Mr. Sit said, although oil prices do represent a wild card. Oil prices might spike up temporarily if war is declared on Iraq, but as a war likely will be short due to superior U.S. military strength, Mr. Sit predicts oil will remain close to its current price of $25 per barrel.
In fact, Mr. Sit said he is more concerned about deflation in the United States, although it's not highly probable this year. "Economic competition from China is causing prices to decline and America industry may have to further contract in order to compete," Mr. Sit said.
Mr. Sit is bullish because he believes the bear market probably hit its low in late July 2002 and tested the low in early October - and survived. Multiyear stock market declines are abnormal and are associated with longer periods of war or economic declines, neither of which Mr. Sit expects during the year. Fiscal and monetary stimuli are in place to adequately sustain the current expansion, he said.
Additionally, Mr. Sit believes domestic equities are undervalued. A more normal valuation for the S&P 500 at year-end 2002 should have been 1,150, a level Mr. Sit expects will be achieved by summer. He predicts even better returns for the tech-heavy Nasdaq because growth and technology stocks will be among the best performers this year.
"The substantial correction in the past three years represented a correction for the excess returns in the decade of the 1990s," he said, suggesting the market will provide normal if not above-average returns in 2003 as investors take advantage of undervalued stocks. Equity returns also potentially will be higher as the equity risk premium returns to more normal levels.
Eugene C. Sit
Chairman and chief investment officer
Sit Investment Associates Inc.
Minneapolis
Assets under management: $7 billion
PREDICTIONS
GDP: 3.5%
CPI: 2.5%
Unemployment rate: 5.5% to 6%
S&P 500: 1,100
Nasdaq: 1,700
Hot sectors: information technology, consumer durables, industrial goods, healthcare.
Hot stock strategy: growth over value, small over large
Hot stocks: Amgen, Citigroup, Vodafone, Intersil, Mercury International, Netscreen Technologies
