Bernie Schaeffer's not arguing with anyone about an expected slowdown in the economy during 2007, but his prediction that a weakened economy will propel the stock market may cause some raised eyebrows. Schaeffer, winner of BusinessWeek's best forecaster competition in 2003, predicts the Dow will reach new heights at 14,400 by yearend 2007.
His expected 17% growth rate in the Dow from Dec. 6 of this year to the close of the competition next December puts him at the top of BusinessWeek's list as the most bullish of this year's forecasters.
Particularly low expectations among investors will set the stage for positive surprises according to Schaeffer, chairman and chief executive officer of Schaeffer's Investment Research. "The expectations come from a wall-of-worry factor," he says. "I don't think the economic earnings environment is going to be as negative as people fear."
"Rush to the Exits" The greatest potential buoy to the U.S. equity markets could result from a reversal of the imbalance of mutual funds flows going overseas. With 80% to 90% of flows going into often unstable foreign markets, Schaeffer says there is a great potential for a rush of money to come back the other way. What would cause such a reversal? An unexpectedly strong dollar or crash in an international market? "If you're investing in overseas markets you might want to pull back," he advises, "especially if you've got a disproportionate amount of your portfolio invested in those markets."
Within the U.S., Schaeffer says the oversaturated energy sector may suffer due to the excess money flows currently directed at the energy markets. "A lot of money chasing a sector is always a concern because disappointments can lead to a rush to the exits and disappointing stock market performance," he explains.
Other sectors, however, will benefit from lower energy prices and will continue to drive growth. Schaeffer also expects that increased access to credit will engender stock buybacks, putting money back in the hands of shareholders who will continue to invest in new markets.
Schaeffer was drawn into the world of finance between the ages of 10 and 12 when his Dad would take him to visit the New York Stock Exchange. The energy and emotion that radiated from the trading floor lured him in. "It was fascinating to me," he says. "I just got the bug." By Sonal Rupani