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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | SEPTEMBER 14, 2001 INVESTING Q&A Expect a "Stagnant Economy" Says BW's Bill Wolman: "I do believe we are in a recession. But I do not believe that the recession will be severe"
Any increase in government spending on defense and security will take too long to kick in to have any positive effect soon, Wolman believes. He thinks economic growth in 2002 could be as low as 0.75%. And although stocks may rally when the markets first reopen, he expects any surge to be very short-lived. Wolman made these comments in a chat presented Sept. 12 by BusinessWeek Online on America Online, as part of AOL's live coverage of the attack on America. He was responding to questions from Jack Dierdorff and Amey Stone of BW Online. The text of the chat follows. Q: Bill, you've had at least 40 years of watching the economy and the markets. But this seems like a unique event -- the terrorist actions. What's your assessment of the impact? A: Well, Jack, terrorist acts are unusual, but psychological shocks -- like, for example, the JFK assassination -- do tend to have a dampening effect on the markets and the economy itself. There is some tendency for measures of consumer confidence, which in this kind of economy can be treated as equivalent to investor confidence, to decline. However, it doesn't take very long for the fundamentals to reassert themselves. So what happens to the market will depend on what happens to the economy. My expectation, as I've been saying for some time, is for a sustained period of relatively sluggish economic growth. I do believe we are in a recession. But I do not believe that the recession will be severe. However, the growth rates of the '90s, especially the second half of the decade, will not be sustained. That suggests to me that despite the recent declines, the market is still overvalued. There may be a relief rally -- perhaps as soon as the markets reopen. But it will be short-lived. Q: Bill, what do you expect to see when the markets reopen? A: I think there's a very good chance that when the markets open, they will reach levels well above the European close of today, which would indicate an increase of about 2% in the S&P 500. However, I really stress that this is a very short-term forecast. I believe the direction of the market continues to be downward -- and that'll show pretty quickly. Q: Do you think increased government spending on defense and security will help the economy? A: I simply think that any scheduled increases in defense spending that result from this event will be slow to be implemented and will not help very much. Much more depends on what the Federal Reserve will do. And in that respect, today's Fed statements are reassuring. The Fed is providing the economy with liquidity, particularly through the discount window. And that is exactly the right thing for the Fed to do. The European Central Bank is also making easing noises -- and that, too, is reassuring. So the threat of a crisis seems to me quite remote. The real threat is a "blah" market. There is simply no magic wand that can be waved that will suddenly cause the excess capacity in the technology sector to go away -- and that is the fundamental problem that affects the entire world economy. Q: Consumer spending has been the strong point of the economy, with business spending pretty stagnant. How do you think consumers will react to the tragic news? Will they continue to prop us up? A: History suggests that psychological shocks of the kind that occurred Tuesday do cause consumers to hesitate. There are other reasons why consumer spending should slow down, including high debt levels and, obviously, rising unemployment. The best bet is a stagnant economy for a far longer period than the average economist is forecasting. In its forecast made a few days ago, the National Association of Business Economists had an average forecast of 2.7% growth [in gross domestic product] for 2002. I suspect growth of about 0.75%. It's always good to remember that those who are consistently wrong provide very useful information. Q: Bill, the next Fed meeting, I believe, is Oct. 2. Do you think we'll see a Fed rate cut before then? Or on that day? And would action before Oct. 2 be a positive for the markets? A: My best guess is that there will not be a rate cut before the next regularly scheduled meeting. It's still hard to tell. But if the evidence shows that the insurance companies, which will have to pay claims, run into liquidity problems, the Fed could act on an interim basis. When the market opens, watch very carefully what happens to the shares of Zurich Reinsurance, and also of General Reinsurance. GE Capital also owns a reinsurance company, so watch those shares, too. They will give you a clue as to the real strains on the market -- and whether the Fed will have to act strongly to prevent a real crisis. I don't believe it will -- but I'm far from sure. Just as an FYI to everyone, those companies I mentioned are reinsurance companies, which are the insurance companies for insurance companies. Generally, a company such as Prudential spreads the risk on the policies it writes by paying a fee to the wholesalers, as it were (the reinsurance companies), to absorb the excess risk. And it's the reinsurers who collect that fee and absorb that risk. Q: What would you recommend for a puzzled investor now? For a college or retirement fund, for example? A: I'd say the Treasury bonds, which pay 4%, plus the equivalent of a cost-of-living adjustment that is geared to the inflation rate [Treasury Inflation-Protected Securities, known as TIPS]. If the Middle East really blows up -- and I believe that to be a distinct possibility (particularly if bin Laden and his types can destabilize the government of Jordan or Saudi Arabia) -- then we'd face an inflation threat. I cannot assess the probability that this kind of destabilization will occur, but it is real enough that right now I'd want protection in my bond portfolio. As I remember it, you can only buy $30,000 worth of these bonds per year. But that may not bother you if you're not really rich. Edited by Jack Dierdorff Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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