A Market Going Nowhere Fast


The good news is that the U.S. economy isn't falling apart, but the bad news is that the stock market is still trying to recover from the bursting of the bubble. As a result, William Wolman, longtime BusinessWeek economist, thinks "we face at least five years of extremely mediocre markets."

Wolman calls the chances of a double-dip recession small, but he suggests conservative investing, especially for older investors -- who might want to bail out of stocks and into bonds. For younger people, he urges diversification. In the bond market, Wolman is especially positive on TIPS, the Treasury's inflation-indexed securities. He also believes that investors should study foreign bond markets, in part because of the declining dollar.

These were among the comments Wolman made in a chat presented July 30 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from this chat. A complete transcript of this chat is available from BusinessWeek Online on AOL, keyword: BW Talk.

Q: Bill, was that stunning four-day rally the start of something big? Or is there still some bad news ahead?

A: My own guess is that it isn't the start of something big. My judgment is that the market will hack along for the next few months without too much change. The reason is that fundamentally what is dominating the market is the aftermath of the bubble, which is far from over. That's the bad news. The good news is that the economy is not falling apart, although growth is slowing. So I do not expect too much change from these levels in either direction.

Q: Is there any hope for the stocks of the recent basket cases? Is WorldCom (WCOME) stock ever going to come back on the market?

A: The best judgment on WorldCom is that is is not going to come back. If you're defining basket cases as a large part of the technology sector, traditional measures of p-e ratios suggest that tech stocks, believe it or not, are still overvalued -- and while I have great faith in the tech sector as the engine of growth, it is suffering from an overvaluation problem that continues.... And to go out on a long limb, I think we face at least five years of extremely mediocre markets. That, folks, is reality, even though we unquestionably have a great economy.

Q: Should we take this opportunity with recent rises to bail out?

A: To that, I have a conventional answer: It depends on your place in the age structure. The older you are, the better the argument for bailing out. The other point I would make is also conventional -- for those who are young enough to make a substantial bet on the market, diversification is extremely important.

Q: Where is the bond market going?

A: The answer is that interest rates will stay relatively low for a long period of time. There are places in the bond market that are nevertheless still very good investments. If I can do some self-promotion, in the recent book which I co-authored, The Great 401(k) Hoax, we strongly recommended the Treasury's TIPS, or inflation-indexed bonds, as a very good place to be. There are also some new exchange-traded bond funds which are being introduced that are worth looking at.... It's very important for the investor to learn more about the bond market, because it will be very important in the investment outlook that I foresee.

Q: How can this economy continue to spend money when all of our 401(k)s and savings are being depleted?

A: I think the answer to begin with is that most people do not have 401(k)s. The other answer is that, unfortunately, according to research by Edward M. Wolff at New York University, in 1998 the median 401(k) had about $13,000 in it. So for the average American, the Wal-Mart shopper, the fall in the 401(k) has not had a major impact. However, it has obviously affected high-income wage earners and is having some impact on their consumption patterns. Final point on this -- there is a psychological effect.

Q: I've just turned 62. Do you have a 401(k) allocation suggestion?

A: I would be extremely conservative and stick to the bond market. I am now doing some serious work on how 401(k) plans are likely to change in the wake of all the problems. I am delighted to report, after talking to lots of people in this area, that there is a lot of change under way. I believe that many companies will improve the bond options available to their employees. I also have noticed with total delight that a few companies have now made it possible to buy TIPS in their 401(k)s.

Q: Where are the dollar, euro, and yen going? And what will the impact be on our market and economy?

A: It seems to me that any country which is spending about a billion and a half dollars more than it is taking in has a currency problem. The U.S., of course, is that country. I therefore believe that the dollar will be under substantial downward pressure against the euro and also against the yen over the next 12 months or so. In terms of learning about the bond market, it's also important to learn about foreign government bonds, because this may be where the best bond plays are.

Q: Do you think international stocks will gain?

A: My best guess is that some foreign markets will outperform the U.S. market over the next couple of years, certainly when valued in terms of a declining U.S. dollar. So just as in the case of bonds, if you've got the time, you should really begin to understand the European markets and the Japanese market.

Q: Please comment on the risk of the U.S. entering a Japan-like deflationary period, and the chances of a double-dip recession.

A: A Japan-like period is unlikely, given the substantial strength of the U.S. economy. There is some chance of a double-dip recession, but I would put it as small. However, I do not see robust growth before 2004. And although I do not think we're facing a Japanese-style market, my best guess, as I have said, is that the rates of return in the U.S. stock market will not be strong over the next five years. At the risk of being boring, the most important fact dominating the market is the long-term implication of the bubble that has burst.

Q: How do you keep from smacking the bejesus out of Larry Kudlow in your TV debates?

A: That is a very good question. Actually, though I consider Kudlow's opinions off the wall, he's a very bright guy and has a high IQ, and it's fun to joust with him. Then, of course, I usually think that I win the debates!

Q: Whatever Larry Kudlow thinks, what message would you leave for investors today, Bill?

A: That although I do not expect a further major decline in the market, I think it will have great trouble making substantial gains for the next couple of years. That argues for a conservative investment policy in which dividends [should] be an important part of your returns.


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