Bond Managers Like Stocks

The year 2006 is off to a roaring start for stocks. And with fed funds futures predicting only one more rate hike from the Federal Reserve -- maybe two at most -- even fixed-income managers are saying this could be the year for stocks.

"Even though I've spent most of my career in bonds, I'm thinking that over the next year to two years equities should outperform bonds," says Jerry Webman, director of fixed income at OppenheimerFunds.

That's because like so many economists and money managers, Webman believes that the fed funds rate will top out at 4.75%.

"It's important to look at what you know matters to the Fed chairman ... and they've told us over and over again that it's core inflation and that they'll sleep soundly with anything below 2%," says Mitch Stapley, who oversees $14 billion as chief fixed-income officer for Fifth Third Funds.

He says the core personal consumption expenditures index, or PCE, the Fed's chosen inflation measure, is at 1.8%, so it makes sense for the tightening cycle to end with the Federal Open Market Committee's March meeting.

The housing market and the economy are slowing, but not contracting, just as Alan Greenspan has said they should, even while employment growth stays solid, Stapley says.

"Add all those things together and I see a bunch of Fed governors sitting pretty pleased ... with a slowdown in growth that markets and institutions have time to adjust to," he says.

If this is indeed the course the central bank takes, equities historically rally before the second-to-last rate hike as traders anticipate the end of a tightening cycle, says Bob MacIntosh, co-head of muni bond funds at Eaton Vance.

Moreover, foreign investors appear to be growing more bullish on U.S. stocks and may be looking beyond the Treasury market in order to reap higher returns.