Stocks: Three Pros, Three Scenarios
Since ending its free fall in January, the Standard & Poor's (MHP) 500-stock index has settled into a fairly narrow range, bouncing back and forth like a ping-pong ball. We talked to three market experts—a bull, a bear, and an unabashed hybrid of the two—for their take on what's around the corner.
The Bull: James Paulsen, chief investment strategist at Wells Capital Management, sets the agenda for the $232 billion invested in its funds. His optimism has been on the rise.
THE RATIONALE: After advocating caution, Paulsen recently unleashed his inner bull. The recession won't be as bad as people think, he says. Housing prices won't stop falling just yet, but real estate activity will soon find a bottom, and that alone will add 1% to gross domestic product. Meanwhile, tax rebates and other fiscal stimuli will open consumers' wallets. Investors have been hoarding cash, waiting for the crisis to end. As fear dissipates, the market has nowhere to go but up.
THE STRATEGY: For aggressive investors, Paulsen recommends putting 20% of assets in bonds and 80% into equities, with an emphasis on small-cap stocks, since they're the first to recover coming out of a recession. He also sees value in industrial and transport stocks but would avoid defensive sectors like consumer staples. While Paulsen thinks the U.S. will outperform the rest of the developed world, he recommends overweighting emerging markets, where he sees continued growth.
S&P 500 TARGET: 1650 (yearend 2008)
The Bear: Jeremy Grantham is chief strategist at Grantham Mayo Van Otterloo, which manages $152 billion. He believes the 26-year bull run is definitely over.
THE RATIONALE: The late-'90s tech mania should have been the dying gasps of a great bull market, says Grantham. But the Federal Reserve kept rates at historic lows much longer than necessary, creating the housing bubble and the credit mess in the U.S. Fixed-income and world equities markets seem to understand the world is in a crisis unlike any in the past 30 years, but U.S. equities stumble blithely along, he says.
THE STRATEGY: Take as little risk as possible, counsels Grantham. There are no bargains in equities, so if you invest in stocks, stick to blue chips. As a hedge, short the Russell 2000 index, since small-cap companies will be squeezed by larger competitors and face credit problems. The daring can buy up farmland in emerging markets to take advantage of long-term trends in food and agriculture.
S&P 500 TARGET: 1100 (by 2010)
Ned Notzon, head of the allocation committee at fund giant T. Rowe Price, doesn't try to hide it: He doesn't know where the overall markets are going.
THE RATIONALE: The economy will right itself. But the credit crunch still hasn't played itself out, and with globalization under attack, international trade might not be the buffer it could be. The market will be up again, but where it will be by yearend is anybody's guess.
THE STRATEGY: T. Rowe Price favors the large-cap growth style over value; its asset allocation underweights small caps. High-yield bonds are starting to look attractive but will grow more attractive still. For money needed in a year or two, avoid the stock market.
S&P 500 TARGET: ???