… And What For An Encore?

Is the stampede still on, or is the bull market soon to be corralled?

down. But by the end of
the year, if the economy is too sluggish, they could decide to lower rates just to avoid a recession.

BE: What does that spell for the markets?

STEPHON JACKSON: Charels and I are in complete agreement. Almost everyone has a benign view, but my biggest concern is that the market hasn’t had a shock in the recent past. And as we know, generally the longer you go without a shock, the more likely you are to get one–and bull markets never die of old age, they have heart attacks. I think corporations not meeting earnings expectations could affect the market. I’m never comfortable saying there’s going to be a violent move, but I think that it does put a damper on prospects this year. Then on the flip side, with so much money pouring into our stock market from abroad as well as for retirement funds, it would be tough to be too bearish.

BE: How much of a shortfall in corporate profits do you see?
JACKSON: I expect corporate earnings to increase on the order of 8%12%. That’s less than the 12%-15% or even 10%-15% that people had seen
the last two years.

BE: How do you think that is going to play into the psyche of investors?

C. KIM GOODWIN: What’s important though is what the market expects. If there is a shortfall relative to that, then we have a serious problem.

CHRISTOPHER WILLIAMS: People have become so accustomed to positive earnings surprises. Intel came in with very strong earnings but if they had disappointed investors, the stock would have taken a pretty significant hit.

BE: So the market is in for a bumpy ride?

GOODWIN: The market was up roughly 37% in ’95, and 23% in ’96. There have been only four times in history where you’ve had that kind of backto-back performance. In each case, the market underperformed for the next two years. Still, I think this will be a stock-picker’s market, and we’re confident we’ll make money for investors. One other factor. Historically, the market does not outperform in the second term of the administration. One difference, though, is that Democratic administrations tend to help smaller stocks, because their initiatives focus on the domestic economy.

BE: With corporate profits due to ease, is it a good time to look into bonds?

SELF: Yes. Ten percent has historically been the return you expect from stocks. But we’re hearing today that stocks will rise maybe 8%-9%, and that makes bonds look good. You still want to have equities for growth in the long term, but you have good opportunities in bonds when you can get 6% and 6.5% for five-year Treasuries if you hold them until maturity. Inflation is up to 3%, so there’s an inflation premium of 3 percentage points which is higher than an historical average of 2%. We also have the best chance in a long time for progress on the balanced budget agreement which would reduce the supply of bonds being sold by the U.S. government at a time

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