Last year's crystal balls made for some sound gazing. The 76 stock market seers we surveyed last December for BusinessWeek's 2006 Fearless Forecast expected the Dow Jones industrial average to hit 11,250 by midyear. On June 30 the Dow closed at 11,150, less than a percentage point below the consensus estimate. (In 2005, by contrast, the Fearless Forecasters were off 7% at midyear.) In fact, more than 20 strategists came within 100 points of predicting where the Dow would be at the end of June. An impressive collective performance, indeed.
We asked four folks who seem to have starkly different opinions to tell us what lies ahead for the market in the next six months. Barry Freeman, a strategist at HPC Capital Management, is expecting the sell-off that began in May will take the market down 11% by yearend; Christopher Conkey of Evergreen Investments and Hugh Johnson of Johnson Illington Advisors see stocks continuing to climb higher. Meanwhile, Warren Bagatelle of Loeb Partners expects the market to tread water for the rest of the year.
Managing Director, Loeb Partners
Bagatelle, 67, sees a relatively strong economy but is lukewarm about the stock market. Curbing his enthusiasm are political and emotional factors, such as war and corporate scandals, that he thinks can undermine investor confidence and turn consumers in other countries against U.S.-made goods. Another damper, he says, is the revolving door in the Bush Administration. "You plan on the policies and practices of a particular set of people, and suddenly those people are gone," he says.
Despite a market that he says will be choppy at best, Bagatelle's portfolio is largely in domestic stocks (69%), with no allocation overseas, a particularly contrarian view. "Investing in the U.S. is going to be a wise decision," he says. Bagatelle, who is based in New York, is bullish on Pfizer (PFE ) and the health-care industry. "People are living longer," he says, creating more demand for their products. He sees other opportunities in the smaller companies of the Standard & Poor's 500-stock index and the Russell 2000, which are less sensitive to macroeconomic trends and have faster growth rates than the megacaps.
Bagatelle's yearend target for the Dow is 11,150. An avid boater, he'll have plenty of time for sailing if the market stays calm for the rest of the year.
Chief Investment Officer, Evergreen Investments
All but nailing the markets this summer, Conkey and his nimble team of analysts are sanguine, to say the least. The 46-year-old strategist predicted a yearend Dow of 11,750 -- a slightly lower forecast than his earlier target of 12,000, but still more bullish than that of any other top midyear stockpicker. "We saw a strong economy both domestically and globally," he says of the last six months.
That's not to say Conkey isn't cautious. His midyear forecast of 11,000 was lower than only 12 of the 72 others who provided them. "The markets will face some headwinds going into the second half of the year," he says. Those include weaker consumer spending and higher interest rates. "It may take several more tightenings before the economy cries 'uncle,"' he says. As long as the Fed keeps using interest rates as a brake on the economy, he expects that inflation will not become strong enough to hurt economic growth or earnings potential.
Looking ahead, Conkey favors large-cap growth stocks, which he believes are undervalued, but he's leery of the tech sector, which had been his favorite until only recently. He's particularly worried that the emerging options-backdating scandal will hurt tech companies. "In the post-Enron world, even the hint of scandal makes investors uneasy."
Strategist, HPC Capital Management
The outlook from Freeman's perch in midtown Manhattan is not very bright. He sees the Federal Reserve continuing to raise short-term interest rates from 5.25% to 5.75%. In addition, as rates rise, more homeowners with adjustable-rate mortgages are going to get whacked, which means they'll cut back on consumer spending. "Many people living paycheck to paycheck will have some serious issues," Freeman says.
Decreased consumer spending will lead to softer corporate earnings. Freeman thinks inflation fears will grip investors and put downward pressure on the dollar. These fears will also push up the price of gold to $750. That's why he recommends stashing 10% of your portfolio in gold, either through an exchange-traded fund or with mining company shares. The Dow, he figures, will be around 10,200 in December.
As dire as this sounds, Freeman, 28, still thinks investors should keep about 40% of their portfolios in U.S. equities, while allocating another 40% to bonds and 10% to cash. In his spare time, Freeman plays golf and lends his support to his hometown baseball team, the Atlanta Braves. "Right now they need it," he says. The prospects for his favorite team are as dim as his forecast for the market.
Chief Investment Officer, Johnson Illington Advisors
For much of his 40-year investment career, Hugh Johnson has focused his attention on the bond market. "I've had more success forecasting interest rates than stock prices," says Johnson, 65, who was surprised to learn that his midyear stock market forecast was on target.
Now he's upping the ante, boosting his yearend forecast for the Dow from 11,450 to 11,600. "Corporate earnings will expand, and the Fed will stop raising short-term interest rates," he predicts. "That combination should be good enough to drive the stock market up 5% or more from current levels."
When we polled Johnson last December, he picked technology as his favorite sector. While corporate technology spending hasn't been as robust as Johnson anticipated in the first half of the year, he expects it to pick up in the third and fourth quarters. Although General Electric (GE ), his favorite stock for 2006, is not a pure technology company, he thinks it will benefit from that spending. He argues that GE will get an added lift as investors shift to large-company stocks after more than six years of focusing on small caps.
In February, Johnson and a few partners took over the asset-management arm of his former employer, First Albany (FACT ), and renamed it Johnson Illington. Being in charge of more than $670 million in client assets, as well as eight employees, is a new experience that keeps him up nights.
The real source of his angst, however, is the Federal Reserve. Most worrisome is Chairman Ben Bernanke's "singular focus on inflation and adamant insistence on having a 2% or lower core consumer inflation rate," Johnson says. Since the Fed has hinted that the rate hikes may end, so may Johnson's worries. If his market forecast comes true, that may make him feel better, too.
By Bremen Leak and Lauren Young