we are likely to see over the next couple of years, should help sustain a market advance.
BATTS: I would agree with that assessment and add that I think there are some structural changes [to the economy] that are going on that we are going to have to address. The impact of the administration’s stimulus package, in the short term, unquestionably had some benefit in the third quarter of 2003. But the real question that we have to determine is, Can the administration promise a guaranteed Social Security benefit, Medicare, tax cuts, corporate subsidies, No Child Left Behind, improved education, and still cut the federal deficit? There are some inconsistent policies put forward, and I think that we are going to have to deal with that.
But, having said that, we are seeing that companies continue to accelerate their earnings momentum so we have reason to expect that, in 2004, the rally will expand to some of the higher quality companies this year.
DIAMOND: I wanted to point out that there is a risk to all of the rosy outlooks that we’ve just described. I’m very confident there is going to be a pickup in business investment, but I’m not as confident on the strength of the consumer because it has been driven by a lot of tax stimulus. The tax stimulus that is coming the first half of this year is about $42 billion, so, again, we’re going to get more artificial stimulation, which makes the consumer feel really good about him or herself. When that goes away, which will be in the first half of 2004, the consumer may, in fact, falter unless there is real improvement in the employment sector. Markets are going to be at risk because companies have already gotten very lean and mean. How much more can they cut?
B.E.: What signs should an investor look for that will indicate whether this market has legs to continue or whether it might be slipping back into a recession?
BATTS: As an investor, I would continue to look at business investment and manufacturing—are there increases in capacity utilization? What effect would a rise in rates have going forward? We still believe in the equity markets as places to go but there are defensive sectors. For example, you look at healthcare. You look at staples. During periods of rising rates, you might find investors beginning to go there and realize some value.
COLEMAN: We’re not focusing on whether we’re in a bear market or a bull market. What we are trying to do is exploit valuation aberrations—we have chosen to concentrate our portfolios in areas that are, in some way, related to telecommunications, broadband, and wireless, because those are areas where the entire sector got blown up. We’re talking 90% declines and higher. In the case of Nortel, an $87 stock became 43 cents. When you see that sort of aberration, you ask yourself, “OK. Now that the panic is behind us, what is the right price for a company like Nortel?”