Ed Yardeni Says It's Up from Here


By Gene Marcial Wall Street pros usually say trying to pick the market's bottom is foolish: Nobody has the wizardry to accurately identify the trough in any given cycle, they insist. And yet many strategists do try. With the proper analytical tools, they think it can be done. Prior to the September 11 terrorist attacks, some strategists had determined that the bottom occurred sometime in April. The attacks skewed all that.

Edward Yardeni, the veteran market sage who's the chief investment strategist at Deutsche Banc Alex. Brown, now sticks his neck out by proclaiming to clients, and through his Global Portfolio Strategy newsletter, that the panic-selling low of Sept. 21, 2001, was probably this cycle's bottom. The Dow Jones industrial average that day plunged 140.29 points, to 8235.81, and the Standard & Poor's 500-stock index plummeted 48.74 points, to 965.80. The Nasdaq composite index also headed south, tumbling 47.74, to 1423.19.

Yardeni bases his conclusion on several charts of key economic and financial indicators in relation to the cycle in stock prices. His findings: Many of the charts that worked best in the past now suggest that the market did hit bottom on Sept. 21. One of them is his interest rate chart, which zeroes in on federal funds rates, as they relate to the S&P 500.

DELAYED REACTION. This chart shows that stock market bottoms usually occur after the Federal Reserve Board has started to ease monetary policy, notes Yardeni. The Fed has cut the federal funds rate nine times this year. Despite those cuts, it has taken longer than usual for the market to hit bottom for a variety of reasons. His chart on the yield curve indicates that the spread tends to cross from negative to positive territory at major stock market bottoms. This time, it did so at the start of 2001, which Yardeni sees as an early indicator of an upturn.

However, Yardeni, who describes himself as a "moderate" and a "realistic" bull, does issue caveats: There are no guarantees, he says, since past performance doesn't always indicate future results. He suggests that the low might still face a retest. "A lower low," he cautions, may yet be in the cards."

But if such prognostications have no certainty, why bother? Ah, picking the exact bottom, although an almost impossible task, "can be very rewarding," argues Yardeni. It can present great buying opportunities, he asserts, if you are on target. Since 1960, there have been nine major troughs in the S&P 500 with declines of 15% or more, and an average of minus 24%. Following those low points, stock prices resurged with an average 12-month gain of some 28%, notes Yardeni. Among the examples: The Cuban Missile crisis in 1962, Bloody Monday in 1987, the S&L crisis in 1990, and the 1997 Asian currency crisis.

READY TO REVIVE. With the benefit of hindsight, Yardeni says, the post-September 11 selloff turned out to be a great buying opportunity. The reason: After that, investors have become increasingly confident that the initial phase of the war against terrorirsts has gone well. And they've become convinced that the latest round of monetary easing and the next round of fiscal stimulus will revive the economy and corporate earnings next year.

"Investors are betting that the bottom of the economy is likely within the next few months and that a strong recovery is possible next year," says Yardeni, who's in the camp of those who believe in a sharp "V-shape" recovery. He expects S&P 500 earnings per share of $40 this year and $55 in 2002.

For the Dow, he's forecasting a flattish year, ranging from 9000 to 10,000 but ending 2002 at 12,000. The Dow is currently at 9348. He sees the S&P 500 moving up to 1100 and ending 2002 at 1250 to 1300. The S&P is now at 1088. He says the Nasdaq composite will remain fairly depressed and should trade between 1500 and 2000 and end up closer to 2000 by yearend 2002.

ADDING HEALTH CARE. Given such a forecast, what's Yardeni doing with his stock portfolio? He continues to "underweight" technology and matches the market's weighting in consumer cyclicals and basic materials. He thinks tech shares remain overvalued despite their sharp decline in the past year-and-a-half. Their earnings recovery might be delayed until next spring, he says, and it won't be as strong as discounted in their current price-earnings ratios, particularly the semiconductors.

Which sectors would Yardeni overweight: Health care. After the attack, it's possible, he says, that the industry will be a major beneficiary of incresased federal spending on guarding against and responding to bioterrorism. Indeed, the government may have to stockpile large quantities of antibiotics and spend more money to fund biotech reseaerch to develop vaccines and antidotes for various germs. Hospitals, he adds, may have to get government funding to improve their facilities in response to bioterrorist attacks.

There are other reasons, of course, to own health-care stocks. First of all, the baby boomers are aging. The number of people 50 years or older is projected to hit 11 million by decade's end, up from 9 million at the end of the 1990s. With life expectancy continuing to rise, demand and consumption of health-care goods and services per person in the U.S. will continue to grow.

Among the health-care stocks that carry a strong buy rating at Deutsche Banc Alex. brown: Amgen (AMGN), Abbott Laboratories (ABT), Guidant (GDT), Medtronics (MDT), American Home Products (AHP), Bristol-Myers Squibb (BMY), and HCA-The Healthcare Co. (HCA), formerly Columbia/HCA. Among the biotechs: Chiron (CHIR) and Incyte Genomics (INCY). How accurate will Yardeni's bottom call be? He'll know soon. Marcial is BusinessWeek's Inside Wall Street columnist


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