The market's recent action can be summed up in a word-fear. And spooked investors are rushing into cash as a hedge against the markets' whipsaw ways, witness the 65% year-over-year jump in assets flowing into money market funds.
"People will come to their senses when they see their money languishing" and soon yielding less than 3%, Duncan Richardson, executive VP and chief equity officer of Eaton Vance Corp., told a Eaton Vance-sponsored market outlook panel discussion in New York on Tuesday. "Then equity funds will seem more appealing again."
Still, panelists from the Boston-based investment firm painted only a so-so picture for investors. Their scenario for 2008 looks like this: A recession is unlikely but volatility will continue; the Federal Reserve will continue their rate cuts; the slowing economy will keep Washington from raising taxes, and bank loan funds will trump bonds.
Eaton Vance chief economist Robert MacIntosh, who also manages 11 tax-exempt funds, placed the odds of a recession at 25%. He said the combination of the U.S. dollar's depreciation over the past year and a strong export sector has offset slowed consumer spending. He said the Fed's recognition of a slowdown and apparent willingness to head off a recession through several recent rate cuts computes to economic growth of 1% to 1.25% for the first three quarters of 2008.
MacIntosh predicted the federal funds rate will end up at 3.25% through June's meeting, and that economic weakness has squelched tax-hike rhetoric for now.
On the equity side, Michael Mach, manager of Eaton Vance's large-cap value portfolios and co-manager of several dividend-oriented funds, predicted the market will be plagued by concerns relating to the credit crisis, inflation, high energy prices, a possible recession, and political uncertainties during the election year.
Not surprisingly, Mach favors large-caps vis-à-vis other market-cap sizes in 2008, particularly companies with strong business franchises, solid balance sheets and market leadership positions that give them greater competitive stability than mid- or smaller-cap stocks. He expects energy and consumer staples to do well again this year, and plans to go bargain hunting in the financial and consumer discretionary sectors. "We think that some of these stocks could be big alpha generators in coming periods," he said.
In fixed income, Eaton Vance is bullish on municipal bonds and bank loan funds despite their turbulence. MacIntosh sees long-term value in the municipal-bond sector because long-term municipal yields currently are in excess of Treasury yields. "You're essentially getting tax exemption for free," he said.
Scott Page, co-manager of the firm's $20 billion bank loan fund portfolio, said bank loan funds-i.e. floating-rate funds-are priced at 95 cents on the dollar and have a significant amount of safety to absorb defaults if a recession occurs. "A lot of risk is already priced in," he said. Page believes they're a better investment than bonds right now.
-Bruce W. Fraser