Has anybody seen a raging bull lately? Or has it gone the way of the dodo bird?
Last Thursday's gains notwithstanding, it's starting to seem like the whole world's going bearish. From spiraling inflation to a sinking dollar, everyone has a reason not to buy stocks now.
With this in mind,
headed out on a financial safari in search of optimistic mutual fund managers. What we discovered is that there are more Wall Street bulls out there than you think.
Rising interest rates are the foundation of the widely accepted bearish argument on stocks. Should the cost of borrowing increase too much too quickly, say the bears, it would lower the boom on the red-hot housing sector. Unable to borrow against his home, the all-important American consumer would then be forced to chop up his credit cards and cut back on his mocha cappuccinos, stalling economic growth.
One of the prime culprits in this doomsday scenario is the
. Wary of inflation taking root, the Fed has raised rates seven straight meetings, putting its key fed funds target at 2.75%. But while long-term interest rates have actually fallen, it seems investors have bought into the bearish argument by selling stocks whenever bond yields tick upward.
But even after a series of rate hikes, the Fed has been far from restrictive, says George Schwartz, portfolio manager for the $80 million
Schwartz Value fund. Schwartz says the Fed has been accommodative since the start of the recovery and doesn't expect that to stop now.
"They won't slam on the brakes and cause a recession," says Schwartz, a veteran manager whose value fund has returned 14.5% annually over the past five years, besting the
by more than 17 percentage points over the period.
Schwartz is so confident that higher interest rates won't derail the consumer that he has increased his exposure to consumer-driven stocks like discounter
Dollar Tree Stores
Furniture Brands International
and flooring maker
Schwartz isn't alone. Unlike the Goldman Sachs analyst who projected oil prices would pass $100 a barrel, Jim Carroll doesn't think crude costs will take off and prompt an energy-based recession. In fact, Carroll -- portfolio manager for the $36 million
Loomis Sayles Value fund -- anticipates a wave of supply hitting the market as a response to the global search for high-priced oil, which will in turn knock down prices. He also expects China's demand for crude, one of the major factors behind the spike in global oil prices, to subside as the country's red-hot growth rate inevitably eases.
And why should anybody listen to a mutual fund manager about energy prices? Because, before he started running money, he was a longtime energy analyst. And in his opinion, "The odds are against runaway oil prices."
Carroll also dismisses discussion of higher energy prices pushing up inflation to the point where it harms U.S. economic growth, saying that inflation -- even after recent run-ups in the CPI and PPI indices -- remains historically low under the watchful eye of a "vigilant Fed." As for the current rate of growth, Carroll says 2.5% to 3% is not too shabby, especially in comparison with other developed nations.
"We are going to see 12 to 18 months of solid gains particularly in stocks," says Carroll, whose favorite names include stocks leveraged to economic growth like commercial finance company
Burlington Northern Santa Fe
Furthermore, Dave Goerz, chief investment officer for equity at HighMark Funds, adds that higher oil prices also serve a positive role by helping slow the economy -- without pushing up rates.
"With the oil shock, the Fed will not have to raise rates as quickly," says Goerz, who expects the fed funds rate to finish the year at 3.5% and the 10-year Treasury note to yield a relatively paltry 5.3%.
"There is still not much yield in bonds," says Goerz. "This is still the optimal environment for stocks, especially considering the earnings we have been seeing."
Goerz says his funds have been buying on recent market pullbacks, shifting toward growth areas like tech and away from value. Among the tech names he likes are software providers
Another bull in a mutual fund shop -- you see, they are out there -- is Duncan W. Richardson, chief equity investment officer at Eaton Vance funds. He furthers Goerz's valuation point by noting that the market's current forward P/E ratio of 15 corresponds to a 6.6% yield -- a 2.3 percentage point stretch over current 10-year Treasury yields. In other words, in Richardson's opinion, there is a way to go before it will be worth switching to bonds.
And he adds that now definitely is not the time, considering the corporate earnings hitting the market -- the bulwark of another bullish case.
"Earnings are of record level and quality," says Richardson. "Now is not the time to be out of stocks."
Hank Herrmann, chief investment officer at mutual fund company Waddell & Reed, takes a different tack by arguing that the bears' problem is simply one of vision. In his April note to shareholders, Herrmann makes the case that in spite of lower index levels, the glass is indeed half-full, if you look at the indices properly.
"While it's true that stocks are not enjoying great returns in 2005 to date, it also is true that there is quite a bit of rotation going on inside the stock indices, which could create some erroneous impressions if you look only at the broad total," writes Herrmann, who goes on to say that stocks' disappointing performance during this year's first quarter is mostly due to financial stocks and technology stocks, which represent about 35% of the total value of the
"So, as these two sectors lag, comprising a large percentage of the total as they do, they are pulling down the returns of the overall index," says Herrmann.
Finding the bright side, as well as the bright sector, Herrmann says, "In contrast, and unclear from broad index readings, is that some components of the market are doing quite well. The energy, materials, commodities and machinery sectors are generally seeing strong returns, with energy by far the strongest."