Where the best and brightest see things headed in 2004.
With the stock market coming out of a three-year coma and the economy in the midst of what looks to be a notable turnaround, most advisors want to know: What now? Is this really a full-blown recovery? Or just a short-lived reversal of fortunes, propped up by a wide array of artificial stimuli?
To find out, we asked some of the best and brightest minds working in the advisory, brokerage and investment management fields what they see happening in 2004. With a string of economic indicators that includes a scorching third-quarter growth rate of 7.2% and a surge in employment, many of the experts we interviewed for this story believe that the U.S. stock market is destined to turn around for some period of time.
But the real question is for how long? The extent of experts' optimism-whether it's Lincoln Anderson, chief investment officer at LPL Financial Services, or investment advisor Judith Shine, who manages $300 million in client assets-is mixed. While some economic watchers believe the real story yet to unfold will be rising inflation and interest rates, which are likely to flatten any real stock market gains, others believe that U.S. productivity will continue to set the stage for strong stock performance for years to come.
We decided to let the folks in the know tell their stories themselves. Without further delay, then, here is what our experts have to say about the economy, interest rates, the stock market and even impediments to investing success going into the new year. Where applicable, we asked them to put their money where their mouths are and show you their actual returns.
Expert: Judith A. Shine, President
Shine Investment Advisory Services, Englewood, Colo.
Years in profession: 18
Assets under management: $300 million plus
Claim to fame: Enviable client retention. "I think I've lost maybe eight clients in 18 years, and only one was to another advisor," says Shine. She's also been on Worth's list of top advisors since its inception a decade ago.
Economic outlook: "I feel pretty bullish because I think some recent incentives, especially income tax cuts, are just huge. There's an enormous tide of prosperity coming at us, provided the Fed doesn't mess it up and allows rates to gradually adjust to their historical levels."
Interest rate outlook: "I think the real story here is, what do you do on the fixed-income side for clients? I'm not worried about inflation, but I don't think we can keep rates below 4% and stay competitive. The point is we're at an extreme with bonds, and it's always difficult to call the turn."
Stock market outlook: "I see 50% gains over two to five years. We're halfway there, so I think we'll see another 25% gain. We're projecting 7% to 9% returns going forward." Recommended asset allocation: "We're overweighting international and emerging markets within our stock allocations. With the wave of devaluation and cost-cutting, we think Europe and Pacific minus Japan are pretty attractive."
Favorite investments: "A very broadly diversified portfolio. It's so true that you can run, but you can't hide. Now you can't even run."
Performance as of October 31, 2003:
YTD: 22.9%
One-year: 23.9%
Three-year: -4.3%
Five-year: 5.88%
Impediments to investing success: "People chasing the market and forgetting that taxes are real and that everything has to be evaluated on an after-tax basis."
Expert: Lincoln Anderson, Chief Investment Officer
LPL Financial Services, Boston and San Diego
Years in profession: 25
Claim to fame: Anderson, who spent five years as an economist at the Council of Economic Advisers under President Ronald Reagan and eight years as director of economic and sector research at Fidelity Investments before joining LPL Financial in 1999, has been predicting a strong economic recovery since the first quarter of 2001.
Economic outlook: "I'm in the camp where I expect a very strong, sustained recovery. I think 2004 should be a very good year. I'm not certain how long it will last, but I don't see any impediments either."
Interest rate outlook: "I expect rates to move up and the curve to flatten. Both the strong economy and a recovering stock market will drive the increase. But I don't agree that rate hikes will halt the economic turnaround."
Stock market outlook: "It will be up, but I'm not really putting any numbers on it. I believe a strong, sustained stock market seems inevitable. I don't foresee shrinking equity premiums. I don't think it's a new world. After a period of very strong overvaluations, we're coming out the other side."
Recommended asset allocation: "In general, I advise reps to move clients up in terms of equity weightings and down in terms of bond weightings.
Favorite investments: "Large-cap U.S. growth."
Possible Impediments to investing success: "It's the standard list in terms of risks: Another big terrorist attack, high oil prices and financial problems in Japan are all up there. For investors, the biggest risk now is staying with asset classes that have outperformed. That means bonds."
Expert: William Bengen, President
Bengen Financial Services Inc., El Cajon, Calif.
Years in profession: 15
Assets under management: $43 million
Clients: 95
Claim to fame: Bengen has built individual stock portfolios that have consistently beaten the S&P 500 by an average of ten percentage points from 1993 through 2002.
Economic Outlook: "I don't give too much thought to the economy as far as investing goes. It's too big for me to get my arms around."
Interest rate outlook: "Not a clue."
Stock market outlook: "Hopefully up, but it depends on what period of time your talking about. Five to ten years out, I think we'll be beating where we are today. In the short term, I'm not so sure."
Recommended Asset Allocation: "We're all over the place. We have folks with as little as 20% stock allocation and those all the way up to 100%. Depends on their age, risk tolerance, need for cash and a host of other factors."
Favorite investments: Liz Claiborne, Washington Mutual, Pfizer and, "as always," Berkshire Hathaway.
Performance through October 31, 2003:
YTD: 12.91%
One-year: + 7.3%
Three-year: + 0.5%
Five-year: + 10.3%
Possible Impediments to investing success: "My own stupidity, for me. For investors, lack of emotional control."
Expert: Christopher C. Davis, Portfolio Manager and CEO
Davis Selected American Shares, New York City
Years in profession: 15
Assets under management: $5 billion in Davis Selected American Shares (the firm manages another $35 billion in large-cap core products)
Claim to fame: "American Shares has outperformed the market for the past ten years. We manage with that goal in mind-beating the market over a long period. It's also unique that we eat our own cooking. Our employees, their families and our directors are the fund's largest shareholders, owning about $2 billion in shares."
Economic outlook: "We're nervous about earnings and corporate profits and above all nervous about stock valuations. We think they're very high and interest rates are very low, so the foundation of the economy is fragile as we see it."
Interest rate outlook: "They're so low. We know they won't do in the next five years what they did in the last five years because they'd have to dip below zero."
Stock market outlook: "There is danger in valuations and complacency. It's time to be skeptical of big promises and very focused on realistic expectations."
Favorite investments: AIG, Berkshire Hathaway, Progressive, American Express, Hong Kong Shanghai Bank, Tyco and Altria.
Performance as of October 31, 2003:
YTD: 21.7%
One-year: 23.3%
Three-year: -3.4%
Five-year: 5.3%
Impediments to investing success: "For investors the problem is always the same-chasing whatever worked in the last three years."
Expert: James Floyd, Portfolio Manager, Senior Analyst
Leuthold Core Investment Fund and Leuthold Weeden, Minneapolis
Years In Profession: 30
Assets under management: $380 million in Leuthold Core
Claim to fame: Floyd is the brain behind the fund's quantitative and stock-picking analysis. This is key since the unique fund can shift between stocks and bonds and sell stocks short and often does, creating average annual returns of more than 11% since the fund was launched in 1995.
Economic outlook: "There is plenty of economic stimulus out there and it's starting to show up. It also looks like the employment picture will be very good for at least another year or two. It gets tougher to see much beyond that. The problems we see are the rising budget deficit and higher interest rates, which we think will kick in by mid-2004 as the Fed starts to worry about inflation. That's not something the stock market generally likes."
Interest rate outlook: "We see rate hikes by mid-2004. Initially it could be a pretty good size negative for the stock market because people will then start worrying about the next rate hike."
Stock market outlook: "We think there is a 20% potential left for large-cap stocks and another 20% rise in the S&P in the next six to 12 months. Nasdaq, we think, will go up another 30%."
Recommended asset allocation: "We're at 70% for stocks (the fund's maximum) and have another 22% in high-yield stocks and bonds, utilities stocks and REITs. We're using another 5% of assets to short Treasuries right now, which leaves about 3% in cash."
Favorite investments: Foundry Net, Freeport/McMoran Cooper/Gold, Canon ADR, Cisco, Inc. (As of October, Leuthold stopped disclosing investments. These are from MorningstarAdvisor.)
Performance as of October 31, 2003:
YTD: 37.85%
One-year: 41.01%
Three-year: 8.37%
Five-year: 10.53%
Impediments to investing success: "Rate hikes, the Middle East and terrorist activity at home have unfortunately become facts of life."
Expert: Sheldon Lieberman, Portfolio Manager and Principal
Hotchkiss and Wiley Large Cap Value Fund, Los Angeles
Years in profession: 15 years
Assets under management: $74 million
Claim to fame: While it's getting more and more difficult to find deep value, Lieberman has managed nicely to unearth stocks that had his fund beating the S&P 500 thrice over at the October 31, 2003 mark. One reason: This fund takes dividends seriously.
Economic outlook: "We don't really spend a lot of time looking at short-term economic events, but consumer confidence has shown large gains, as has GDP, which showed the fastest growth in 19 years."
Interest rate outlook: "My guess is that to the extent we see the recovery continue to unfold, we'll see some upward pressure on interest rates."
Stock market outlook: "We're still finding pockets of undervaluation. To me the market looks pretty fairly valued, but that assumes we get earnings growth of 15% to 16% next year. Longer term I think we go back to a more historical norm of 3% to 4% equity premium over long-term interest rates."
Recommended asset allocation: The fund, which is 100% stock and keeps cash below 4%, counts financial services, consumer services, business services and technology as its top investments.
Favorite investments: EDS, Sears, J.C. Penney, Metropolitan Life, Computer Associates International.
Performance as of October 31, 2003:
YTD: 31.9%
One-year: 31.1%
Three-year: N/A
Five-year: N/A
Impediments to investing success: "There are fewer value opportunities than there were three years ago, so we're taking bigger positions."
Expert: Steven Romick, President and Portfolio Manager
First Pacific Advisors Crescent Fund, Los Angeles
Years in profession: 12 years
Assets under management: $350 million
Claim to fame: FPA's Crescent Fund is the No. 1-performing hybrid, moderate-allocation fund over the past decade (its ten-year average annual return is 12.9%). It only had one down year relative to the S&P 500's three declining years. Also notable, the fund performs quite differently than peers, thanks to its focus on small-cap value, junk bonds and convertibles.
Economic outlook: "I think we'll see GDP growth in the 5% to 6% range over the next five to ten years. I don't think the next decade will be better than last decade."
Interest rate outlook: "We don't really look at rates."
Stock market outlook: "We're looking at returns in the 3% to 5% range over the next decade. I hope to do better than that."
Recommended asset allocation: "I have a go-anywhere fund. My allocation is 50% long, 10% short, 20% high-yield bonds and 20% cash (which holds the collateral for the fund's short positions, so the cash position is really 30%).
Favorite investments: Patterson-UTI Energy, Michaels Stores, National Oilwell, Celanese AG and US Treasury Bonds.
Performance as of October 31, 2003:
YTD: 21.7%
One-year: 23.6%
Three-year: 21.6%
Five-year: 10.9%
Impediments to investing success: "People getting scared into and out of the market at the wrong time."
Expert: Laura Tarbox, President
Tarbox Equity, Newport Beach, Calif.
Years in profession: 24
Assets under management: $220 million
Clients: 140 clients
Claim to fame: Tarbox was among the first advisors in the country to create a "core-and-explore" approach to portfolio building, which indexes 60% of client portfolios across all asset classes, then layers in active funds and stocks.
The goal, says Tarbox, who has taught a CFP course for more than 20 years and this year is dean of the Financial Planning Association's Residency Program, "is to meet or exceed clients' needed rates of returns."
Economic outlook: "Generally positive. I think things are starting to hit on all cylinders. Manufacturing is starting to show strength, which we've been waiting for. We'll probably see GDP growth at 4% this quarter and for the first half of 2004."
Interest rate outlook: "We think the Fed may need to raise rates in the first or second quarter of 2004, maybe 1% to 1.5%."
Stock market outlook: "For long-term planning purposes we're using 8% returns. We think 2004 will be good, but probably not as good as 2003's double-digit returns."
Recommended asset allocation: "For growth, where most of our clients are, we're using 20% cash and fixed-income, 30% large-cap, 20% mid-cap, 15% small-cap and 15% international."
Favorite investments: "We'll be overweighting iShares and small cap."
Performance as of October 31, 2003:
YTD: 22%
One-year: 23.7%
Three-year: -0.2%
Five-year: 5.1%
Impediments to investing success: "I keep seeing clients switch styles-from growth to value, from asset allocation to market timing-at the worst possible times."