Why The Experts Are Upbeat

They see lower rates driving stock gains in 2001

This year's roiling markets may have given investors heartburn, but Wall Street's finest are calmly predicting better times ahead. According to BUSINESS WEEK's survey of 40 investment strategists, 2001 will be a year of controlled growth. The average prediction: a 12% rise, to 12,015, for the Dow Jones industrial average; a 14% rise, to 1,558, for the Standard & Poor's 500-stock index, and a 23% jump for the Nasdaq Composite Index.

Most forecasters believe that the Federal Reserve will lower interest rates at some point in 2001. The move will be driven by a weak first half, they say. And thanks to the Fed's action, the economy will finish the year strong. "Expectations are low now and should shift toward optimism as the year progresses," says Clare W. Zempel of Robert W. Baird & Co. "Recession will be avoided." Zempel, in fact, is the most bullish for 2001, predicting a Dow of 13,250 and an S&P of 1,825 by yearend.

Nonetheless, strategists stress that they don't see a return to 1999's irrational exuberance. "Investors, hurt by 2000's market, will be much more valuation-sensitive," says Prudential Securities Inc.'s Greg A. Smith, who expects "growth, but at a price." Many foresee similarities between the second half of 2000 and the first half of 2001, as credit troubles affecting big commercial lenders come home to roost.

ZERO BOUND? The dismal performance of Internet stocks certainly burned the true believers. Last December, many forecasters predicted a volatile year for the sector, yet only a few--including Thomas M. Galvin of Donaldson, Lufkin & Jenrette, George Egan of Spencer Trask, and Thomas McManus of Bank of America Securities--were decidedly bearish on Internet issues.

But for next year, expectations are gloomy. Many foresee continued failures for all but the strongest, best-recognized players. Investing in Net stocks is "very tough for mere mortals," says McManus. "Yes, there will be diamonds to find among the ashes, but many of these stocks are still going to zero." One lone contrarian, John H. Shaugnessy of Advest Inc., says the Internet sector should rebound if the Fed cuts rates.

Most market watchers, though, have their eyes on financial services, technology, and health care--focusing on bargains. Technology is "poised for recovery," says David A. Katz of Matrix Advisors Value Fund. Katz picked Compaq Computer Corp. (CPQ) as his favorite for 2001--because it's "selling at a reasonable valuation." Financials stand to benefit from lower interest rates.

You may not want to believe stockpickers. After all, few of these gurus foresaw that the Nasdaq would plummet or that the Dow would wind up lower at the end of the year than at the start. Instead, they predicted an average 8.3% gain for the Dow and a 5% rise in the Nasdaq. And their individual stock picks were even less accurate.

But there were some good calls. A market dynamics Cassandra Award goes to James M. Meyer of Janney Montgomery Scott, who said in last year's survey: "Excessive speculation will lead to a 10% to 20% correction at some point during the year." His predictions for 2001 include a rebound in the tech sector after valuation adjustment and a strong finish for the year. Strictly by the numbers, the investment team at Jurika & Voyles were the big winners. The Oakland (Calif.) value investors nearly nailed the Dow's Dec. 8 close of 10,719, and came close on both the Nasdaq and the S&P.

There were some wild misses. Bull Laszlo Birinyi Jr. of Deutsche Bank Securities Inc. predicted a 14,000 Dow. Bear George Jacobson of Trevor Stewart Burton & Jacobson forecast an 8,800 close. They both were about 2,000 points off. Jacobson again is bearish, predicting that the Dow will fall in 2001 to 8,100 and the Nasdaq to 1,800. Bernie Schaeffer of Schaeffer's Investment Research and John L. Regan of Josephthal & Co. were widest of the mark on the Nasdaq, predicting levels of 5,000 and 4,800 respectively, vs. 2,917 on cut-off day.

Where many of our fearless forecasters really stumbled, though, was in their picks of individual stocks. Of the 42 companies that were lauded as good bets twelve months ago, a staggering three quarters lost value in 2000. Some of the widest misses were, as could be expected, Internet and high-tech stocks. Kudos, though, are due to a few forecasters who struck gold. State Street Research's James M. Weiss's pick, insurer Ace Limited (ACL), was up 160% for the year. Prudential's Smith named graphics processor NVIDIA Corp. (NVDA), for a 110% gain. And the investment team from Jurika & Voyles picked OM Group Inc. (OMG) for a 50% gain.

But they were among a minority. After a rough year, it's no wonder that our fearless forecasters are hoping for a more forgiving market. And if the Federal Reserve lowers interest rates as they expect, they may just get it.

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