MLWAUKEE — Investment strategists at an economic conference expressed a generally positive outlook for the economy and stock market in the coming years, but they also said there are things that could surprise the market.
The UW-Milwaukee Defining Markets 2013 Outlook Conference was hosted on Friday by the UW-Milwaukee Lubar School of Business and sponsored by ACG Wisconsin, Bloomberg, CFA Society of Milwaukee, Dana Investment Advisors, FPA of Southern Wisconsin and RW Baird.
Kevin Spellman, director of the Investment Management Certificate Program at the Lubar School, moderated the opening session.
Spellman said the good news for the current economy is real GDP is forecasted to improve, and unemployment is expected to fall while inflation remains stable.
The bad news, he said, is that the price of oil is projected to remain elevated, interest rates are expected to rise and, even though it might fall, unemployment is expected to remain elevated.
“This is the exact same slide I had last year,” Spellman said of his big picture overview.
William Delwiche, investment strategist for RW Baird, said his company is slightly bullish on the stock market, adding that the money the Federal Reserve is attempting to put into the economy is ending up in stocks.
“If you look at all of (the) sentiment indicators, there is a lot of optimism,” Delwiche said, noting that virtually all areas of the market are moving higher. He said the current market rally could continue, but a correction is possible in the short term.
The market is currently building a foundation for the next bull market, Delwiche argued. He highlighted several areas that could build a bridge to that bull market — which he said would likely come late in 2014 — including encouraging savings over consumption, developing a national energy strategy and establishing certainty in the tax code.
James Paulsen, chief investment strategist for Wells Capital Management, said he is expecting growth to be better than estimated in 2013. He said the economic recovery is on track, there is more optimism, the Eurozone is calmer and emerging markets are returning to where they were before the recession.
“We’ve been told from the get-go, this is a new normal recovery,” Paulsen said.
He contended that recoveries have taken a similar path over the last 25 years. An aging population has meant recoveries are slower to start but are more sustained, he said, adding that the fourth year is when the economy gears up again.
“Rather than this thing being broken, I think it’s just a different recovery than we’re used to,” Paulsen said.
He added that prior to 1985, recoveries took off quickly with growth between 5 and 8 percent.
“I think what we’ve got is a 10-year recovery,” he said. “This recovery is right on schedule for how the new economy rolls out.”
Paulsen said corporate profits have returned to being above their historical trend line while the stock market has remained below the trend. He attributed the lag to a lack in confidence. By examining historical data since World War II, Paulsen identified periods of “gloom” and “glee.” The current situation mirrors the end of a gloomy period, he said.
“What comes next?” Paulsen asked. “Glee, baby.”
He said there hasn’t been a great deal of confidence in the market, which has been accentuated by concerns about the future.
“Right now, we’ve got an economy being run by a bunch of church mice being told there is an Armageddon coming,” Paulsen said, adding that the lack of confidence and fears about the future are an asset.
“All we have to have is someone whisper to the public, ‘It’s going to be OK,'” Paulsen said.
Daniel Phillips, investment strategist for Northern Trust Global Investments, said progress in the European Union has helped to settle the market. He pointed to the recent Italian elections as an example, arguing that in the past, the market would have been likely to “shoot first and ask questions later.” Instead, when Italians nominated “a comedian and a convict,” there was some reaction by the market, but not as dramatic a response as it would have been a year ago.
Phillips said one of his concerns is the potential for an outbreak of prosperity around the world. He said the Federal Reserve would not be able to react quickly enough, especially given the steps it has taken to pump money into the economy.
Paulsen agreed that unexpected growth could be a problem. He noted that previous recoveries have seen spurts of growth that caused problems.
“My biggest risk for the future is that inflation gets out of control,” Paulsen said.
Delwiche said his concern was on the opposite end of the spectrum.
“From my perspective, we remain in a stop-start economy,” Delwiche said, adding later, “I feel like we’re still in this period of lumpy economic growth.”
Both Delwiche and Paulsen expressed a mixed view on the performance of the Federal Reserve over the last few years. Delwiche said quantitative easing efforts have helped to spur the stock market upward.
“There’s more to it then printing money,” Delwiche said. “There is the confidence that comes with it.”
Paulsen said the Federal Reserve has done a good job of managing the fundamentals of the market, but a horrible job managing confidence.
“We’ve been dealing every year with convincing arguments of Armageddon,” he said, adding that the resurrection of confidence has been behind the market moving upward.
Delwiche said the Federal Reserve has tried to move beyond managing the downturn, but hasn’t been able to.
“They’ve tried to take the next step and promote growth. They don’t have the tools to do it,” he said.
— By Arthur Thomas
For WisBusiness.com
