January 2005  Email this  Print this
 License or reprint this article
FORECAST
Where To Put Your Money Now
by Jeffrey R. Kosnett
Imagine a year when investors are bombarded with bad news -- the Fed hikes interest rates time and again, energy prices spike, the U.S. gets bogged down in Iraq, terrorists commit ghastly deeds there and elsewhere. A prescription for disaster for the stock market? Could be. But stocks refused to buckle in 2004. Consider the market's 8% return for the year through mid November a moral victory -- and a good omen for 2005. "This resistance to all the bad news is a sign of a fundamentally strong underlying market," says Ben Pace, chief investment officer for Deutsche Bank Private Wealth Management, in New York City. The coming year should be catch-up time for stocks. Until a post-election day rally boosted the market, frustrated investors watched stocks snooze as earnings for companies in Standard & Poor's 500-stock index rose some 20% and inflation and long-term interest rates remained stable in defiance of widely held expectations.
But we think investor confidence in the health of the economy will grow as 2005 progresses, and that should help push stocks upward. Barring some unforeseeable catastrophe, double-digit gains are in the cards. We'd argue that gains of more than 10% are achievable in the coming year.
Daniel Gozzi, a doctor who lives in Rockville, Md., and his wife, Jessica, intend to do some buying. "This is a moment of opportunity," he says. Gozzi sees promise in technology and biotechnology, but he's also picked up shares in a company that's as low-tech as they come - -ElkCorp., a maker of roof shingles. Gozzi, 37, reasons that companies involved in roofing should benefit from all the extra work created by the rash of hurricanes that hit the U.S. in '04. One thing's for sure: There should be opportunities in many corners of the market in the year ahead.
Cheaper prices
For investors looking for value, the moderate returns of 2004 have made stocks more attractive. Because share prices essentially stood still as earnings rose sharply, the market's price-earnings ratio has shrunk. Heading into 2005, the S&P 500 trades at 17 times estimated year-ahead profits. By comparison, the market sold for 18 times earnings going into 2004.
Given today's interest rates, stocks are, at worst, fairly priced and perhaps even undervalued (interest-paying investments, such as bonds and money-market funds, compete with stocks for investors' cash). Ernie Ankrim, head strategist for the Frank Russell Co. in Tacoma, which advises investors and monitors money managers, suggests that "stocks haven't been this cheap since the summer of 1995." Adds Ankrim: "If you make any mistakes, make them in favor of stocks" rather than fixed-income investments.
Kevin Bannon, chief investment officer for The Bank of New York, is one observer who thinks the market can gain 15% in 2005. His prediction is based on the assumption that corporate profits will increase 10% in 2005. Bannon also believes that even if interest rates rise a bit, investors will be willing to pay a bit more for each dollar of earnings -- that is, push up the market's P/E -- because higher rates will signal an improved economy. Throw in a dividend yield of nearly 2%, and he arrives at his 15% forecast. As prices rise, Bannon figures, investors who withdrew or withheld money from stocks will find their way back: "They've been looking over their shoulder at the risks," he says. "Now, they'll see the opportunities."
Consider the market's exuberant advance around the election as an indication of the solid year we anticipate. Among the major indices, look for the Dow Jones industrial average to hit 11,500 by the end of 2005. The S&P 500 will approach 1300.
Clearly plenty of investors are itching to charge into stocks. Take Kyle Chapman, a 26-year-old banker from Charlotte, N.C. He says business at his family's machinery-manufacturing company in St. Louis has been running at a record pace since summer. Moreover, lending activity at his bank is picking up. Chapman has stumbled a few times in his early investing career, but the technology and wireless-communications stocks he rode down two years ago are rebounding. He and his wife, Carrie, a fellow banker who is staying home with their new baby, are hanging on to these stocks and investing new money in diversified stock and balanced mutual funds. "I'm bullish, and I feel very good about where we are today," says Chapman.
The best alternative
Or consider Daniel Klein of Springfield, N.J., whose wife, Mindy, just gave birth to twin girls. Klein, 39, vice-president of a hazardous-waste disposal company, says the strength of his employer's business instills confidence about the economy. Figuring that stocks should have done better in '04, Klein is looking for solid gains in '05. But his main reason for staying the course: He has to make money. "I have begun to have nightmares about two college educations and two weddings," says Klein. The alternatives don't offer him enough. Bond and CD yields are barely higher than they were a year ago.
1
2 NEXT 
|
|
MAGAZINE
