RIDGELAND — Look for a slower than normal economy recovery, rising long-term bond yields, stocks to break out of a two-year losing streak and inflation to remain low in 2002.
“We began (2001) bruised,” said Stacey Wall, an economist and investment advisor, and president and CEO of Pinnacle Trust in Ridgeland. “And we ended the year battered — a year when corporations saw their worst performance in a decade, our record long economic expansion ended, and when investors saw stock prices fall for the second year in a row for the first time in 25 years. And a year that witnessed the most horrific attack on American soil since Pearl Harbor. It has been nearly five months since the tragedy of Sept. 11…and we’re getting back to normal.”
Wall shared his economic predictions for 2002 — and thoughts about 2001 — with business leaders at the 5th annual Economic Forecast Luncheon, sponsored by Brandon-based Community Bank, in Jackson on Feb. 5 and in Hattiesburg on Feb. 7. Wall will address business leaders at the Howard Johnson Hotel on 110 U.S. Highway 11/80 in Meridian at 11:30 a.m. on Friday, Feb. 15. This year marks the first time Wall has taken his annual economic forecast luncheon on the road.
“This is our fifth year to sponsor the Economic Forecast Luncheon,” said John Arledge, senior vice president of marketing for Community Bancshares of Mississippi, Inc. “Because of the popularity of the one here in Jackson and because of our new alliance with Pinnacle Trust, we decided to have more luncheons in some of the other markets we serve across the state.”
This series coincides with Pinnacle Trust’s recent strategic partnership agreement with Community Bank. The bank will begin offering Pinnacle Trust services to its customers and Pinnacle Trust will include Community Bank as a priority financial institution for its staff, stockholders and clients.
“We always enjoy sponsoring Stacey’s presentations,” Arledge said. “It seems only fitting to us that a bank would provide its customers with some useable economic research to help them plan their financial year.”
Wall is well known for his accurate assessments of national and global economic conditions to forecast trends in the economy, bond markets and the stock market, and generally has standing-room-only for his popular economic forecast luncheons.
Last year, Wall said he feared a recession, but thought it would be one of the mildest on record. Recent economic data confirmed that it is.
“Probably one of the more interesting studies I found in doing my research for this year’s forecast has to do with what happens after the Federal Reserve ends an easing cycle,” Wall said. “One year following the last Fed rate cut, the economy has been higher in 10 of the last 12 cases with a mean gain of 4.7% for GDP. The unemployment rate was down in 11 of 12 cases by 0.8 percentage points, on average. That’s obviously good news for a struggling economy.”
Wall said he was concerned about a rather weak recovery because of a trouble spot: the economy is fighting too much debt.
“U.S. household debt as a percentage of Gross Domestic Product is at record levels,” he said. “I’ve talked about rising debt in years past, but until now, I’ve pointed out that falling interest rates have allowed us to have our cake and eat it, too: refinance your home, save $300 a month, and keep borrowing and spending. Now that rates have virtually bottomed, consumers won’t be able to count on refinancing much longer to ease their monthly debt obligations. And with so much of consumers’ income going to service credit card, mortgage and other debt, less money is left for spending and for saving.”
Conditions in the automotive and housing sectors are questionable, Wall said.
“Automakers induced many people to buy cars in the fourth quarter of last year through zero-rate financing,” he said. “As a result, car sales are going to suffer in the first quarter, and that will pull down consumer spending. The Mortgage Bankers Association recently reported that mortgage purchase applications soared to record highs. But I’m going to predict that the housing market is finally peaking in many parts of the country. Historically, housing has gotten a boost near the end of an easing cycle when interest rates have been coming down. It’s sort of a last gasp mentality — buyers keep waiting for rates to drop and then rush to finance when rates appear to be bottoming out.”
Inflation will probably remain very low in 2002, probably less than 2%, Wall said.
“Twelve months following the last rate cut by the Federal Reserve, the inflation rate fell in six of 12 cases by -0.3%, on average,” he said.
If Wall’s forecast about interest rates is accurate, it won’t be a stellar year for bonds.
“Bond yields generally trough around the last rate cut,” he said. “One year later, Moody’s AAA industrial bond yields have been higher in nine of the last 12 cases and rose an average of 0.5 percentage points. Using the Dow Jones Bond Average, an index of high-grade corporates, bond prices lost an average of 2.0% one year out. Now, don’t go out and sell all of the bonds in your portfolio. As we’ve seen in the last couple of years, bonds are great to have in your portfolio to reduce volatility. But you’ll probably want to keep your maturities in the short to intermediate range. By the end of the year, long-term bond yields will likely be moving up.”
The more pressing question about the stock market concerns upside potential, not whether or not the market has bottomed, Wall said.
“As with most economic recoveries, stocks bottomed out ahead of the economic recovery,” he said. “Our overall theme for the stock market is that liquidity is putting a floor under stock prices while valuation is providing a ceiling. The government is doing everything it can to stimulate the economy out of recession and the massive liquidity they are providing is giving us support and a ‘liquidity driven bull market.’ Yet at the same time the ‘Main Street Mania’ craze, which brought the public into the stock market and culminated in the ‘Bubble of 2000,’ drove valuations so high that even after the 2000-2001 bear market, stocks never reached levels of long-term under valuation.”
Stocks should break out of their two-year losing streak this year, Wall said.
“One year after the last Fed rate cut, S&P 500 returns were higher in 11 of the last 12 cases with a mean gain of 19%,” he said. “Small-cap stocks were higher in 10 of the last 12 cases with a mean gain of 28%.”
In the days following the Sept. 11 attacks, Wall said his staff encouraged clients to stay invested based on their long-term objectives.
“Sure, the Dow fell 12% in the subsequent days following the attacks before recovering a few weeks later,” he said. “The market is volatile. Investors forget that, since 1970, we’ve had declines of over 10 percent 21 times and over 20 percent eight times. I have been in the investment business for more than 20 years and have seen many difficult times, including the ‘87 crash — a 23% decline for the Dow in one day — and several recessions.
“Market fluctuations, while normal, are by no means comfortable. But it’s important for us not to lose focus on why we invest in the stock market. When we invest in the market, we are buying companies. We have had hundreds of great companies in our history — Johnson & Johnson, General Electric, Coca-Cola, Wal-Mart, Disney and McDonald’s — with strong histories of earnings growth. And major success stories in the last 20 years — Microsoft, Dell, Home Depot
, Amgen and
Staples. And there will be dozens of new companies created with superior earnings results that will lead the market in the coming decades.”
Contact MBJ contributing writer Lynne Wilbanks Jeter at firstname.lastname@example.org</a.