quantitative approach, and these macro-economic trends are captured in our process and the portfolios adjusted accordingly. So we believe that consumer cyclicals would be a good place to invest. We like consumer staples and capital goods, to a certain extent, where you have securities that have just been really beaten down, beyond where we think their true valuation lies. We see an increased exposure and rotation into those types of sectors.
MICHAEL RAY: What we typically try to do is buy companies with the least short-term visibility. “Visibility” seems to be the new buzzword for all the analysts out there who are downgrading stocks and cutting estimates. Being value investors, we’re probably going to look at something over a two- to five-year time horizon, which may be a little different than most equity managers.
So, in our view, what we’re looking for is a return to normalcy. Normalcy is not the economy growing at 1% [or] earnings growth at 25%. Normalcy is GDP [Gross Domestic Product] growth of, say, 3% or 3.5%. Corporations, in that environment, can return to 6% to 8% earnings growth, on average. I think we’ll have a pretty decent market. It may not be like it was in 1999 and 2000, but I think it will be good for most investors.
With six rate cuts so far this year–275 basis points worth–we’re looking at a pretty good stimulus down the road. Usually, from each rate cut, it takes about six months for that effect to filter into the market. So to this point we have really only felt the effects of the first rate cut. We are also looking at a tax cut bill that was passed by Congress and signed by the president. That should provide about $40 billion, in tax cuts, for individuals this year, and about $70 billion next year. That’s a pretty good stimulus for the economy going forward.
MARK LAY: Well, we think that we’re about to go into a period that will give us the best of both worlds. We’re currently growing at 2.5% to 3%, and the inflation rate as measured by the CPI (Consumer Price Index) is around 2.5%. Under those scenarios, I think that long-term Treasury yields can continue to fall as well as price/earnings multiples will be able to expand. I think that if you look at the driving factors of the U.S. economy, consumer spending, as James mentioned, has remained strong. New home sales, which are a big part of the economy, remain very, very strong. The manufacturing sector, which is measured by new orders, [is] starting to rebound. From our perspective, I think that the worst is behind us and we are starting to build a good base, and I think it would be very positive not only for the fixed-income market but for the equity market.
B.E.: What factors could stall a rebound?
LAY: Now, there are a couple of wild cards out there. The Japanese economy, with the Nikkei being at a 17-year low, is threatening not