Our fearless forecasters sure were a gloomy bunch in December when we polled them about the stock market's prospects for 2007. Citing the housing slump, rising oil prices, and geopolitical instability, only 17 of the 80 strategists thought the Dow Jones industrial average would be above 13,000 at this point. But the blue-chip average surprised nearly everyone by closing up over 7%, at 13,408, on June 29.
Unlike last year, when 20 strategists came within 100 points of nailing the midyear figure, only three came that close this time, with a fourth off by 102 points. A.G. Edwards & Sons' (AGE ) Stuart Freeman, our winner for all of 2006, came closest at midyear, with a 13,450 call.
What about the second half? We asked six of our best forecasters for the midyear, and tossed in another past winner for good measure. Five are bullish but fairly restrained about it. None sees gains above 7%. Here they are, beginning with the most optimistic:
Schaeffer sees signs of negative sentiment everywhere. Bets against the market, in the form of short sales and open interest in put options, are at record levels. Analysts have more stocks at "hold" than at "buy" for the first time in a decade. Some 75% of mutual fund flows are heading overseas. Volatility, a measure of investor fear, has increased sharply.
In his view, it's time to buy. That may sound counterintuitive, but in a bull market, Schaeffer worries when investors get too confident, not when they're too cautious. With the Dow up 7% this year, he says, "you would expect sentiment to be frothy, but it's not."
With moderate economic growth and corporate earnings gains in the mid-to-high single digits, Schaeffer sees the Dow hitting 14,400 before the end of the year. "There are worries," he says nonchalantly, "but there are always worries."
WOOD ASSET MANAGEMENT
When you've worked on Wall Street as long as Stovall has—his first job was 67 years ago, as a messenger—you know better than to bet against a resilient market. "There are a lot of negatives," he says, "but the market keeps rolling on."
Why? Wall Street's primary motivators are fear and greed, and greed has the upper hand. Stovall says people are putting their cash to work because they don't want to miss out on higher prices. That cash should help keep the market's momentum intact, along with stable interest rates and low inflation. In December, Stovall predicted the market would fall slightly during the second half of 2007, but now he thinks a Dow of 14,400, another 7% gain, isn't out of the question.
The global economy just keeps humming. China's on fire, growing 10% a year, with India not far behind. Smaller countries, such as Estonia, Vietnam, and Cambodia, are flourishing. Even Germany, with 2.8% projected growth in 2007, is waking up after years of stagnation. How does a money manager that invests only in U.S. markets take advantage of that? Large-cap U.S. stocks, says Crane, because American corporations are benefiting from increasing globalization.
This is especially true for the industrial cyclicals, Crane's top sector pick, a group that includes General Electric (GE ), Honeywell, (HON ) and DuPont (DD ). All have extensive overseas operations and sell into global markets.
Overall, U.S. companies should see earnings growth in the 6%-to-8% range, says Crane. Companies that are in the Standard & Poor's 500-stock index should have somewhat better profit reports because of their greater overseas exposure. Crane feels "reasonably optimistic" that the Dow industrials will hit 14,000 by yearend.
An avid sea kayaker, Crane says: "The water can get plenty bumpy, so I don't go out when it's dangerous." That's his investing philosophy, too.
CHIEF INVESTMENT OFFICER,
Sichel originally predicted that the Dow would fall to 13,078 by yearend, but the unexpectedly strong U.S. job market changed his mind. Unemployment now sits around 4.5%, and for an economy that relies on consumer spending for more than 70% of gross domestic product, that's very good, says Sichel. He predicts that the U.S. economy should be able to grow at 3% for the year, and corporate earnings should continue to beat analyst estimates. Most importantly, it means the Federal Reserve can sit tight.
Sichel likes the technology sector, especially under-the-radar companies like Harris, which makes communications equipment for commercial and military customers. All told, he sees the Dow finishing the year at 13,800.
CHIEF EQUITY STRATEGIST,
A.G. EDWARDS & SONS
Even in the fourth year of a bull market, Freeman sees bargains everywhere. How so? It's all about price-to-earnings ratios. Back in early 2000, p-e's were around 30; now they sit at around 16 based on the next 12 months' expected earnings. Corporate profits have been growing in the double digits for the last four years, but stock prices have lagged. Freeman argues that the current environment, with slow economic growth and low inflation, is historically a good time for stocks to make up some of that ground. He doesn't see a return to the heady levels of the Internet bubble, but p-e's have room to rise to 20.
Freeman especially likes consumer staples such as drug, food, and beverage companies, a sector with valuations at 10-year lows. His favorite is drugstore giant Walgreen (WAG ), which he thinks will benefit from its plans to build new stores and upgrade older ones.
Freeman's yearend target for the Dow is 13,700. A collector of antique watches, he may be on track if the market keeps on ticking like his timepieces.
TRIPOINT GLOBAL EQUITIES
Our more bullish prognosticators foresee a relatively strong U.S. economy, but not Elenowitz of Tripoint Global Equities, a boutique investment bank. He predicts higher inflation and decreased consumer spending, which will result in lower growth for gross domestic product. Elenowitz thinks the Dow will fall by almost 2%, to 13,176.
Where should investors put their money? Elenowitz has moved some assets to cash because short-term interest rates are well over 5%. He also "loves" international stocks. He now has 25% of his assets in global markets. He's quite active in China and also working to bring Vietnamese companies public on U.S. exchanges. "It's a new developing market that's becoming Westernized," he says.
CHIEF INVESTMENT OFFICER,
UMB ASSET MANAGEMENT
Greiner, our yearend winner in 2005, was the most bullish of the seers back in December. His 13,750 call matched the top, if not the close, of the Dow. Now he sees a volatile stretch ahead, which could mean a 10% correction to the mid-12,000s before a recovery to 13,100 at yearend.
Why so wary? Greiner says the recent runup was fueled by private equity funds and their access to easy credit. But, he notes, lenders have begun to reassess the practices of these funds and may be less willing to finance them if a high-profile deal goes bad. That's a concern because with interest rates flat and earnings growing slowly, the market needs the private equity crowd to keep climbing.
Greiner has cut back slightly on U.S. equities, from 65% to 60%, and moved the money into cash, the better to weather a stormy second half.
By Ben Levisohn