Legg Mason's Miller Expects S&P Gain After Europe's Stress Test
Legg Mason Inc.’s Bill Miller said the U.S. stock market, which has dropped 12 percent from its April high on concerns Europe’s debt crisis may spread, will rise after the region’s banks complete so-called stress tests.
“I think the stress test in Europe will do the same thing that the U.S. stress tests did last year,” Miller said in an interview in Chicago, where he attended the Morningstar Investment Conference. A double-dip recession prompted by the debt crisis is “not probable,” he said.
European Union leaders sought to calm investors by agreeing last week to publish the evaluations of banks’ ability to withstand financial shocks. The U.S. last year released the results of tests on 19 financial companies to determine whether they needed more capital following the subprime mortgage crisis.
The Standard & Poor’s 500 Index could rise as much as 15 percent this year, said Miller, chairman and chief investment officer of Baltimore-based Legg Mason Capital Management, which oversees about $18 billion. His views are at odds with bond-fund managers Mohamed El-Erian, who runs Pacific Investment Management Co., and Jeffrey Gundlach, head of Los Angeles-based DoubleLine Capital LP, who said this week he expects a double- dip recession.
“The long-term view is not very encouraging,” Gundlach said, speaking at the same conference. “Something is going to have to give.”
Miller, speaking at a panel discussion today, said he was “very bullish.”
His forecast was echoed by Richard Freeman, a portfolio manager at Legg Mason’s ClearBridge Advisors stock-fund unit, and Staley Cates, manager of the Longleaf Partners Fund and president of Southeastern Asset Management Inc. in Memphis, Tennessee.
“I am optimistic,” Cates said during the discussion.
The S&P 500 rose 0.8 percent at 2:13 p.m. in New York, after declining as much as 0.5 percent. Stocks fell during the first four days of the week as the Federal Reserve signaled that European indebtedness may harm American growth and sales of new U.S. homes fell to the lowest level on record.
Miller, famed for beating the S&P 500 for a record 15 straight years through 2005, trailed the U.S. market benchmark for the next three years as bets on financial and real-estate companies backfired. His optimism paid off as the stock market surged in 2009, helping his Value Trust fund beat competitors.
Miller’s Value Trust fund was down 7.1 percent this year through yesterday, compared with a 2.8 percent decline for the S&P 500 in that period. His Opportunity Trust fund declined 2.1 percent.
Miller said he likes technology and health-care companies, especially those with high levels of cash. He said International Business Machines Corp., the largest computer-services provider, and Genzyme Corp., the world’s biggest maker of drugs for rare genetic diseases, are among his top stock picks.
He also favors banks such as Citigroup Inc., Bank of America Corp., Goldman Sachs Group Inc. and Wells Fargo & Co., because they have emerged stronger after the global financial crisis, he said. The S&P 500 Financials Index of 79 companies rose as much as 2.7 percent today after congressional negotiators agreed on a financial-reform bill that permits banks to invest in hedge funds and private equity.
Miller said in January the U.S. economy could grow as much as 10 percent this year, assuming companies have profit increases of 25 percent to 30 percent. He has rejected a scenario proposed by El-Erian, head of Newport Beach, California-based Pimco, who said the U.S. economy is poised for a “new normal” of below-average growth.
The U.S. economy grew at an annual rate of 2.7 percent in the first quarter, less than previously calculated, according to figures released today by the Commerce Department. Corporate earnings were up 34 percent from the same time last year, the biggest year-over-year gain since 1984.
Performance at both funds rebounded last year as Miller’s bet on an improving economy paid off. The Opportunity Trust fund soared 83 percent in 2009, while Value Trust climbed 41 percent, beating the 26 percent gain in the S&P 500, including dividends.