The stars of 2002's financial news programs aren't the slick CEOs of theboom years -- they're the more circumspect money managers shepherding theirflock away from the bear's grasp.
But circumspect doesn't mean pessimistic -- some have been almostoutright bullish regarding the equity market. Of course, fund managers, as investors are well aware, have been wrong before. But when one of the most respected equity managers and one of the most respected bond fund managers sound similarly sanguine notes about stocks, even the most discouraged investor may find reason for hope.
Hopeful for 2003
Bill Miller, manager of the
Legg Mason Value Trust fund, which is on track to beatthe
index for the 12th year in a row, has even higher hopes for next year's performance.
"We're positioned with zero cash and are looking at high-beta stocks, whichwill lead the recovery," Miller says. (Beta measures the volatility of astock relative to the market. High-beta stocks would have greater highs andlower lows than the overall market.)
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Miller points to stocks like
, which he bought early in theyear for $11. By July, it had dropped to $2.50, but since then has jumped to $13 a share, and now represents 6% of the portfolio. "I'm not looking attechnology stocks necessarily; I'm looking at high-beta stocks," he says,adding that right now just 2% of his fund's assets are in technology stocks."But the next rally will be led by technology and telecommunicationsstocks, because they're high-beta, high-risk."
And as for the "risk" element, Miller thinks the corporate scandals that sorocked the technology industry have been fully priced into the overallmarket. "The market shrugged off Enron as a one-time event," he says. "Butthen there was
, and corporate governance became more of an issue. But those scandals have now been fully discounted."
Miller dismisses economic data and corporate statements when it comes to hisview of the equity market's immediate future. "The way people think aboutthe market now is backwards," he says. "Economic releases report on thepast, and companies are only looking at what's happening now. But the marketlooks forward."
Indeed, it's the market that determines the economy, Miller says. "We shouldlook to the market to know what the economy's going to do," he says. "If themarket goes up, the economy will be fine."
As for corporate sentiment regarding today's environment, Miller also seespositive signs. "We're starting to see some mergers and acquisitions," hesays. "Companies don't buy others in a deteriorating situation; they buywhen they believe we've hit the bottom of the cycle. We're going to see moreand more of that."
Bond Bandwagon Overflowing
For those investors still looking for a reason to get back into equities,there's incentive in some other surprising places. Bill Gross, who managesPimco's $274 billion bond portfolio, stated last week in his latest"Investment Outlook" for Pimco investors (as well as on
and in theDecember issue of
) that treasuries are trading attoo high a premium and individual investors have shifted their portfoliosway too far into bonds.
"There's little doubt from this Bond Man," Gross says, "that the bondmarket's salad days are over -- 4% to 5% annual total returns at best overthe next several years should be expected."
That's not to say that the flight out of bonds should rival the flight intobonds the market saw last year. But there's less incentive to hide out inthe bond market if you believe that the stock market is ready to rally.