Economist Sees Sharp Post-Y2K Jump

When the lights still work on Jan. 1, billions of dollars will pour back into the market, says Putnam Investments' chief economist.
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A lot of people seem to be saying, "Y2K is probably going to be a big nonevent -- but what if I'm wrong?"

Many of you emailed me a few weeks ago with the "perfect" solution. You figure people are going to panic and sell their stocks and mutual funds at the end of the year, so some of you are selling and going to cash now to avoid the correction and panic. But you are going to put it all back in the first of the year. In other words, you are going to sell high and buy low after all the other crazy people sold low in a panic, which, of course, sets up the buying opportunity. Nobody knows for sure if this timing is a good idea or a bad idea. It is the old conflict between a short-term and long-term strategy. Others are saying, "We are just going to sleep right through it."

To help settle this conflict, we need to have a viewpoint about what is the most likely scenario for the future.

One scenario was recently articulated very eloquently by

Putnam Investments'

noted chief economist, Dr. Robert Goodman. His most recent book is

Independently Wealthy: How to Build Financial Security in the New Economic Era

. I first met Goodman in 1980 at a financial planners' conference. In his keynote presentation, he gave a number of reasons why he thought the 1980s would show tremendous growth in the stock market. In another keynote in 1990, he ventured the opinion that the '90s would be better than the '80s. Now, he's predicting a Dow of 22,000 by 2006. (And we thought

Abby Cohen

was the only perennial optimist.)

Goodman recently made another presentation at an annual meeting of financial planners in San Antonio. He made several interesting points as he developed an overall economic picture for the longer term and ended his presentation on Y2K. He emphasized how important it is not to be distracted by the "financial noise" we will hear between now and the end of the year. The kind of information meant for a daytrader is not useful for the long-term investor, he says. We need to focus our attention on the long-term environment, which is always determined by the likely course of governmental economic policy.

Needless to say, Goodman is very bullish on the future. Here is his take on Y2K:

Right up to the end of this year, concerns over Y2K are going to build. ... The volatility we've experienced in the market will continue. I believe you want to be invested before the end of the year. When people wake up on Jan. 1, they will flip the switch and the lights will actually go on. No Y2K disaster and suddenly everyone will realize they are sitting on too much cash. There's a trillion and a half dollars in money-market funds right now, probably $500 billion of it is precautionary demand, people waiting for some bell to ring. The market could jump very, very sharply.

Goodman suggests dollar-cost averaging on a weekly basis through the end of the year. By March or April of next year, he feels the Dow could be at 12,350. (It closed at 10,617 Tuesday.)

Everybody has to make a judgment call -- and quickly. With a long-term strategy, meaning at least five to 10 years, being fully invested by the end of the year makes a lot of sense to me. Of course, for any money you need within two to three years, my advice has always been to keep that money in short-term bond and money-market funds.

Y2K aside, the rest of Goodman's economic outlook also is worth noting. He disagrees with the popular perception that because wages are beginning to go up, so will inflation. It is only inflationary when corporations can pass the costs on to customers by raising prices. All corporate managers know that, given worldwide competition, they do not dare raise prices for fear of losing market share. This has forced corporations to be more efficient and invest more money in technology. It is accompanied by increasing productivity of more expensive workers.

He also foresees huge government surpluses over the next 10 to 20 years and says that four likely things will likely be done with these surpluses:

  • Use some to maintain real government spending levels.
  • Significantly lower or eliminate estate taxes. There is also a high probability in the next year or two that capital-gains tax rates will be lowered.
  • Use some of the surplus to reinforce Social Security and Medicare.
  • Pay down some of our $6 trillion in debt. There is a good probability the long-term Treasury bond rates will drop to a range of 4.25% to 4.75% in the next two or three years, he says.

Monetary and fiscal policies are working together, instead of at odds -- augmented by a favorable demographic pattern. If long-term rates come down, that would imply an average price-to-earnings multiple of 22 as the norm, he says. "The more confident investors become in the long-term economic environment, the further out they are willing to look and pay for earnings they think they will see 10 to 15 years into the future."

Goodman believes that one of the most significant events of recent times is the revision of economic assumptions by the

Bureau of Economic Analysis

. Our noninflationary rate of growth is double what the bureau assumed. It also confirmed that our savings rates are really positive when taking retirement plans into consideration. When the economists change their econometric models to reflect these changes, he expects the market to make a significant move upward.

Have a great week.

Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at has a revenue-sharing relationship with under which it receives a portion of the revenue from Amazon purchases by customers directed there from