Wall
Street Experts...
How They Expect the
Rest of the Year to Play Out
by Patrick Winton, editor
Closed-End Fund Digest and
Real-Estate Securities
What
was looking like the beginning of a summer rallying took a pause
during the final two weeks of June. During the second quarter,
the Dow was down 4.3%, the S&P 500 was down 2.9% and the
Nasdaq was down 13.3%. For the first six months of the year,
the Dow was down 9.1%, the S&P 500 down 1.0% and the Nasdaq
is off 2.5%.
One saying that's apparent
is that investors are finally beginning to discriminate between
companies with earnings and those without. With investors less
concerned about further aggressive rate increases on the part
of the Fed, given signs of a slowing economy, attention shifted
somewhat to earnings. During the next few weeks, companies will
be pre-announcing, then announcing, earnings for the quarter
and they should be what moves the market over the near term.
As we begin the second
half of the year, what are Wall Street's experts saying? here
are some of their recent thoughts.
In the bullish camp
is Al Goldman, chief market strategist at AG Edward & Sons,
who thinks a rally is near. Goldman thinks that the Fed has pulled
off a soft landing and once the market realizes it, stocks will
rally. Goldman is quoted as saying, "We'll have a better
than average summer rally because we are coming into it so beat
up."
Kemper Funds Group
strategist Dr. Robert Froehlich says that despite recent dramatic
sell-offs, the market doesn't have "any deep conflicts."
Froehlich believes the recent correction was healthy for the
market and wasn't in response to earnings or the economy. Instead,
it was a market-driven correction, caused by the simple fact
that investors eventually sell stocks. That means that the market
can come back as quickly as it went down.
Gruntal & Co.'s
Joe Battipaglia is looking for second-quarter profits to be as
powerful as the first quarter's and see the remainder of the
year benefiting from overseas growth and a four percent run rate
in the U.S. expansion. Battipaglia sees the next leg of all the
bull market being more discriminating, relying heavily on corporate
management's ability to create shareholder value.
Caught in the middle
is where it seems you'll find Bob Doll, chief investment officer
for Merrill Lynch asset management. In a recent CBS Market Watch
article, Doll is quoted as saying, "Things are just flat,
and yet to get there, we have had tremendous volatility. My guess
is it's going to continue bouncing around and going nowhere."
Doll said some possible
scenarios that could change the lifeless direction of the market
are, on the downside, an economy that continues to weaken beyond
the control of the Fed. Or the Fed will raise rates another quarter
point in August, and that won't be enough to slow the economy,
prompting more rate hikes down the line.
Sounding bearish is Barton Biggs of Morgan Stanley Dean Witter. In Barron's Midyear Roundtable, when asked how the rest of the year would play out for the U.S. stock market and economy, Biggs answered: "The good inflation news we had three weeks ago, and the indicators of a weakening economy that triggered the market's latest surge, are false signals. By late summer there will be more signs that inflation is beginning to accelerate, particularly in wages. Also, the economy, though it has slowed, still will be growing at a 3% - 4% real rate, and that's too fast. So the Fed will have to take more action and possibly raise rates by another 100 basis points (1%). The stock market hasn't discounted a soft landing. It may be that we get one, but we don't have one, yet."
Also cautious is Salomon Smith Barney strategist Keith Mullins. In a recent report, Mullins says that with profitable companies once again outperforming unprofitable companies, and the IPO market slowing, rationality is beginning to return to the markets. "While much of the speculative excess in the IPO market has evaporated, it seems that irrational enthusiasm for new issues has not yet completely disappeared. Several of our indicators, however, suggest we have yet to reach a bottom of the recent correction." Mullins believes the recent correction has not yet run its course.
We at the Digest would not be surprised to see the market continue to churn over the next couple of months. Near-term, investors are likely to hear more negative earnings pre-announcements from companies followed by better earnings announcements later in the month, followed by worries over what the Fed will do at their August meeting.
What does all this mean for closed-end fund investors? Not much. One of the wonderful things about closed-end funds is that investors can almost always find value. And things are no different today. We see value among the foreign equity funds, the convertible funds, and selected domestic equity funds. On the income side, we think the multi-sector bond and the investment-grade corporate bond funds offer attractive values.
Editor's Note: Patrick Winton is editor of Closed-End Fund Digest and Real Estate Securities, PMB #283, 4521 Campus Dr., Irvine, CA 92612, monthly, 1 year, $199.
