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The Daily Interview: OppenheimerFunds' Len Darling Sees a Recovery Next Year

Lee Barney

Following a press conference on Tuesday, Darling told Daily Interview he expects a V-shaped recovery, with the economy on the ascent by the second half of next year. He also said economic conditions at a conflict's outset and how inflation develops are the main factors that determine how the market will react.

[The fund executive also noted that OppenheimerFunds, whose headquarters were destroyed in the World Trade Center attack, was "up and running [and] fully operational." All of its employees escaped safely.]

TSC: Len, you mentioned that you expect a V-shaped recovery at this point. Why, and is it possible at all to say when you expect the ascent?

Darling: The rationale for expecting a V-shaped recovery is threefold. One, monetary policy: The latest from the Fed is that they will make all the funds available for the markets to provide liquidity. The Fed did a similar thing in the Y2K event. The other two factors are some fiscal stimulus that we didn't have a month ago and a reduction in the price of energy.

If the scenario plays out as we would expect, we will probably see recessionary numbers of modest proportion in the third and fourth quarters of this year. I believe the first quarter of next year will be problematic, but by second quarter [we should see] positive GDP. And by the fourth quarter, we will be back to trend growth of 3%.

TSC: You said that prior to this event you didn't think the Fed had been aggressive enough in its previous seven interest-rate cuts so far this year, but that you do expect the Fed to be more aggressive now. How low do you expect the fed funds rate to go?

Darling: I think it [could go to] 2.50% to 2.25%, but I'm not sure that's as important as the directive to provide the liquidity that the markets need.

TSC: You and the three other executives who spoke at the conference call this afternoon spelled out your outlook for the economy, and the equity and fixed-income markets, as if the Sept. 11 attacks were isolated events and that this was the end of it. Do you want to address what might lie ahead?

Darling: In times of war, markets behave differently depending on the circumstances you go into. In the eight previous military conflicts, a year after the beginning of the conflict, the markets were either flat or up, with the exception of the Yom Kippur War in '73. In that war, inflation was a problem and interest rates rose. In World War II, we were just coming out of a depression. There was excess capacity, an easing of monetary policy and interest rates were down. The markets performed extraordinarily well in '42 to '43.

So if you go into a war with excess capacity, there is an opportunity for stimulation without inflation. If you go into a period of war where you [are already at] capacity -- like in Vietnam we had the phrase "guns and butter" -- then inflation rates go up and interest rates go up and markets don't do as well.

In sum, war doesn't determine the market. It's really the state of the economy as you enter it and what happens primarily to inflation.