Rebound Or Relapse?

By Matthew S. Scott

DOES ANYONE REMEMBER WHAT A MARKET RALLY FEELS LIKE? The first half of 2003 certainly felt like one: stocks on the Dow Jones industrial average up some 13% and Nasdaq issues climbing a hearty 30% as of mid-August. We haven’t seen such a steady rise in the financial markets in almost three years. With uncertainty hanging in the air from a tepid economy, international upheaval, and ongoing terrorist threats, how can we be sure if the markets are ready to rebound or whether investors will be hurt by a severe market relapse?

We assembled four high-powered money managers to try to answer that question by evaluating the current economic picture and telling us what we can expect in the fourth quarter of 2003 and beyond. Members of our roundtable are Mary Pugh, CEO of Pugh Capital Management (No. 15 on the BE ASSET MANAGERS list with $609 million under management), a Seattle-based firm specializing in fixed-income portfolio management; Isaac Green, president and chief investment officer of Piedmont Investment Advisors, a Durham, North Carolina-based firm focusing on core investing–a portfolio-building strategy identifying quality stocks from each segment of the market; Randall Eley, president of The Edgar Lomax Co. (No. 9 on the BE ASSET MANAGERS list with $1.48 billion under management), a Springfield, Virginia-based mutual fund company that embraces value investing; and Raymond Stewart, president and chief investment officer of Rasara Strategies, a Briarcliff Manor, New York-based money management firm that focuses on value investing within the banking sector.

BLACK ENTERPRISE: Give us your assessment of the economy and market forecast for the second half of 2003 and into 2004.
RAYMOND STEWART: I’d characterize the economy as lethargic, at best. You’ve got unemployment at 6.4% versus 5.8%. You’ve got rising budget deficits. Even if the nation’s policy makers are successful, I do not see more than a 5% to 10% increase in year-end stock prices. Next year, I’d expect perhaps another 5% to 10% gain. I would really have to see a strong pick up in corporate earnings for me to become a little more sanguine about the outlook for the stock market.

MARY PUGH: Our outlook says we are going to see a W type of recovery, which means we’ll have some growth and then we’ll have a slow down in that growth. We won’t go back into a recession, but we will not experience substantial growth either. Our forecast for 2004 would be about 3% GDP [gross domestic product] growth, with interest rates of about 3.75% to 4.5% for the 10-year treasury [bonds].

ISAAC GREEN: Our outlook on the markets for the second half of this year and into next year is…that there is a lot of room for things to get better.

I think it’s possible that the market may correct in the third quarter of this year, based on spiking interest rates; but we don’t think the spiking rates are sustainable or merited. We think stocks are slightly undervalued right now, based on depressed earnings, and that there is meaningful room for

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