The Daily Interview
How much of a roller coaster ride will investors take this year?
, chief investment officer for
Merrill Lynch Investment Managers
, recently predicted that the U.S. equity market will record its second most volatile year since the Great Depression, and that investors will find better returns overseas. We're not sure whether it's bad karma to start the week off on a less-than-bullish note, but in today's Daily Interview we discussed his expectations for the year ahead.
TSC: At this point do you think the market has bottomed?
Since December we've had a pretty sharp decline in technology stocks and the
Fed has lowered rates, so the probability is we found that bottom in the first week of the year, in fact the Friday of the first week of the year. I think that technology at the end of the year will be higher than today. But does it go lower first? I can't answer with confidence that we're definitely out of the woods.
There's not a whole lot of evidence historically that we get these V-shaped bottoms. When you move through
this kind of transition, it's typically a choppy period. I think we're going to have another selling squall in the market in general and tech in particular, but that the worst is clearly behind us.
We're moving from a period where investors are worried about an economic slowdown and earnings disappointments toward a period where investors focus on looking over the valley, and what gives them the confidence to do that is the liquidity provided by the Federal Reserve.
TSC: You've predicted that international markets will outperform the U.S. this year, as the dollar weakens. Why?
Since 1995, the
S&P 500 is up about 300%, and EAFE
the index for Europe, Australia and the Far East is up about 50% in dollar terms. So at a minimum, EAFE is due for some catch-up.
Our guess is we'll get some dollar weakness this year as opposed to dollar strength, which obviously benefits international markets for U.S. investors. My second point would be that the economic slowdown, the delta, if you will, is likely to be less overseas, and in Europe in particular, than it is here. So put all those points together, and we think international markets and Europe in particular are likely to do a little better than the U.S.
TSC: You've also predicted that the U.S. will avoid an economic recession, but that we will see a profit recession.
Well, the technical definition of a recession is two back-to-back down quarters. My point is that I don't think the economy is weak enough for us to get two down quarters of real
GDP, but I think we could have two down quarters of earnings. This slowdown is not likely to go into history books as a recession, but that's not to say profits won't
see a recession.
TSC: So when would the profit recession happen?
The fourth and the first quarters, or the first and the second.
TSC: Do you think investors might discount that and get in now, anyway?
Yes, I think really the question is where we are in that transition. Investors marked down stocks pretty hard in the fourth quarter because of earnings weakness, and they're beginning to look out over the valley because the Fed has come to our rescue, but that doesn't mean there we don't have selling squalls and tests of bottoms.
But if we haven't had it already, my guess is that the low for the market comes here in the first quarter. It could have already come, and we'll see a slow climb from there.
TSC: You've written that "for the first time in a decade, the S&P 500, Nasdaq, and Dow Jones Industrial Average fail to record a record high during the year." Why don't you see that happening?
For the Nasdaq that's pretty easy -- it would have to double to get there. The S&P would have to be up in the high double digits in percentage terms. My best guess is, the market will have a total return in the high single digits this year.