How can so many smart forecasters be so wrong? The 67 forecasters we surveyed last December for BusinessWeek's 2005 Fearless Forecast expected that the Dow Jones industrial average (DJ) would hit 11,054 by midyear. When we checked in with the group on June 30, the Dow was at 10,275, some 7% below their consensus estimate. For people who stake their careers on calling the market, that's a huge margin of error.
A few strategists, however, came a lot closer to the mark. One of the best predictions -- 10,500 -- came from C. Kim Goodwin, who also topped last year's class of forecasters with her prescient 2004 market outlook. Goodwin, former chief investment officer at State Street Research & Management, expects to reemerge this fall in a senior role at an asset-management company.
The other forecasters who came closest to predicting the Dow's midyear level: Thomas McManus, Bank of America Securities (BAC); Wendell Perkins, Johnson Asset Management; Sean Taylor, GAM International; Daniel Dektar, Smith Breeden Associates; and David Joy, American Express Financial Advisors. We caught up with each of them to find out what lies ahead for the markets in the second half of 2005.
Chief Equity Strategist, Bank of America Securities
Get McManus talking about stock valuations, and he digresses into a discussion of soy milk. A case of his favorite brand jumped 7% several weeks ago at Costco (COST) after selling at the same price for years. That has him worried. "We are starting to see a drag on consumer spending power from the bottom up," McManus explains. For many Americans, oil prices are hurting consumption, although "the Neiman Marcus and country-club set have been able to shrug off higher costs of energy so far," he says. As a result, McManus, 49, is bearish on consumer stocks.
But he is pointing investors toward large-cap growth stocks that he thinks are laggards about to rebound. His picks include Chubb (CB), the insurer, and conglomerates Tyco International (TYC) and General Electric (GE).
As for the Dow, McManus is sticking with his original forecast of 11,000 at yearend. Just the same, he's not betting the bank on it. He recently cut his recommended portfolio weighting for equities from the normal 65% to 55%. Stocks, he says, are overpriced and overhyped, and taking some money out of the market is prudent.
Chief Investment Officer, Johnson Asset Management
Perkins, 41, who oversees three equity mutual funds, is also holding to his yearend Dow target of 10,950. In his portfolios, Perkins is focusing on companies whose management is under pressure from investors to increase shareholder value. One example is Wendy's International (WEN), which is under fire to spin off or sell part of Tim Hortons, a rapidly growing Canadian subsidiary. "The rest of Wendy's has really struggled since founder Dave Thomas died," Perkins says. "They lost their marketing edge and have never found a way to overcome that." His funds also own Unocal (UCL), which is being pursued by energy giants Chevron (CVX) and CNOOC (CEO), as well as Federated Department Stores, which is acquiring May Department Stores.
Perkins says he's finding better opportunities abroad. He is bullish on Japanese auto makers Honda (HMC) and Nissan (NSANY), and British pharmaceutical companies GlaxoSmithKline (GSK) and AstraZeneca (AZN). "Britain's drugmakers are in better shape than the U.S. in terms of pipeline of new products," he says.
Investment Director, GAM International
Taylor, with a midyear target of 10,100, was the most bearish of our five strategists. He expects U.S. stocks to do better in the second half. Still, since the market is already higher than he thought it would be six months into the year, he has taken his yearend forecast down a bit, to 10,650.
Taylor's specialty is foreign markets. As a British Army officer stationed in Berlin when the Wall came down in 1989, Taylor guessed right that the Eastern Europe economies would blossom after communism. He pursued a career in fund management. Now the 37-year-old strategist is based in London, where he oversees the $113 million GAM International fund as well as other portfolios.
Taylor sees the economies of Eastern Europe outperforming for the rest of the year. His top pick for the region is the banking sector. His fund owns Hungary's OTP Bank, which is benefiting from high growth rates in a fledgling mortgage business. OTP also offers a way to play markets further East: It's buying assets in Bulgaria as well as Romania. Taylor is also purchasing shares in banks poised to capitalize on the growth in Asia, including Britain's HSBC Holdings (HBC) and Japan's Sumitomo (SSUMF).
Chief Investment Officer, Smith Breeden Associates
You have to hand it to Dektar. His day job is running fixed-income portfolios for an investment firm that doesn't even manage equities. Yet you can't do a good job on bonds unless you know what the competition -- including the stock market -- is up to.
Right now it's not up to very much, says Dektar. The 45-year-old bond strategist predicted the Dow would be at 10,500 by the midyear mark and guesses it will just get to 10,600 by yearend.
Cash, with a 3% or so annualized return, seems to be a safer bet between now and December, especially if the Federal Reserve continues to hike short-term rates. Dektar recently increased the cash allocation in his model portfolio from 15% to 25%. "The expected returns on riskier assets have deteriorated," he says.
DAVID M. JOY
Capital Markets Strategist, American Express Financial Advisors (AXP)
With a yearend target for the Dow at 10,150, Joy doesn't have much faith in the U.S. stock market right now. "Interest rates are going to rise in the second half. That will make life a little more difficult for U.S. stocks, especially if, as expected, we get some deceleration in corporate earnings growth," says Joy, 53. With a recommended international stock allocation of 40%, he's advising investors to look overseas, particularly in Japan.
What's making him bullish on that long-flagging market is his belief that Japan is finally making the structural reforms necessary to invigorate business and the economy. "The culture of the shareholder coming last...is being turned on its head," he explains. Japanese companies are starting to lay people off rather than assure them lifetime employment, and the banks are writing off bad debts.
Although Boston-based Joy was in the ballpark with a midyear Dow prediction of 10,500, this lifelong Boston Red Sox fan was in London during the World Series, nodding off during the final innings of game four. "Being a superstitious Red Sox fan, I just told myself it might not have happened had I been watching." Joy is, however, watching oil prices carefully. "Oil is high because demand is strong," he says. He's not too concerned with oil selling between $50 and $60 a barrel, but he would worry if prices climbed above $70, because annual U.S. economic growth could slow to 3.25%. If that happens, Joy would probably take his Dow forecast down another notch or two.
By Lauren Young