On New Year's Eve, we sat around the table with our boys, eating cheese fondue, and urging Bud and Joe to make thoughtful conversation. Difficult, this.
"Can I talk about my new Transformers video game?" Bud asked.
"No," Sally said. "Tell me where you think the S&P 500 will end the year 2004."
Bud, who has an answer for everything, confidently said, "Five dollars."
"Not five, I'm four!" Joe insisted.
"So what do you think?" Sally asked me, seriously.
"I remember reading something by Andrew Tobias ," I said. "He had been invited to a seminar of renowned economists, and a ritual of the dinner involved making predictions for the next year's economic data, sealing them in envelopes, then opening them the following year. Tobias, who had no idea what would be what, simply added ten percent to every figure and sealed his envelope. He was the one who turned out to be closest to right the next year."
Sally got me thinking, as she usually does. So here are my economic and market predictions for 2004:
1. People will make money.
This sounds facetious, but it's not. Everyday people at all income levels will make money, will do so confidently, will start new businesses, will buy houses, will take out loans. The level of all these activities will increase.
2. The financial markets will get used to the idea of a falling dollar.
The dollar's value ties in with a number of other financial measures: the price of gold, the price of the Treasury bills, bonds, and notes (and their resultant yields), plus the size of the U.S. trade deficit. When the dollar began to drop in a serious way, measured against the Euro, the financial markets experienced some panic. This has largely subsided. That's not to say that the U.S. foreign account deficit does not, and will not, create serious financial vulnerabilities in America. But meantime (see #1 above), people are making, and will make, money. A corollary: The price of gold will top out far below the levels touted by gold bugs on television and radio advertisements.
3. The financial markets will get used to somewhat higher interest rates, as indicated by the yield of the 10-year Treasury.
Demand drives the price of government bonds, just like anything else that gets bought and sold. Traditionally, when stocks do well, bonds do poorly, and lower bond prices mean higher yields. But that's not always true. The 10-year Treasury now trades (after market January 14, as I write) at 3.99% -- in other words, bonds got bid up. And stocks did very well today too on yet another encouraging report, of less than expected increases in the core Producer Price Index.
There is a psychological barrier at a 10-year Treasury yield of 4.55%, with special bearing on the homebuilding and home-buying sectors. Homebuilding stocks appear to have bounced from their third and hardest correction since taking off last spring. I opined in another venue that the housing stocks couldn't stand another correction. Now, I'm not so sure. It may be time to buy the homebuilders again. These stocks trade at low price-earnings ratios (10-13), they own real property, and they have real orders.
Plus (see #1 above), people are making money, and will continue to make money. They will buy houses, just as they always have, and they will get used to somewhat higher mortgage interest rates -- rates which, after all, are still historically very, very low.
So here are my predictions for the three major market averages for the end of 2004:
Dow, 13,650; NASDAQ, 2,626; S&P 500, 1,430.
I haven't quite done a Tobias. These figures represent a 30% increase in the Dow and S&P, and a 20% increase in the NASDAQ. I figure some rotation away from small-cap and high technology companies to more established brick-and-mortar and industrial firms, as represented on the NYSE, and by the Dow average. This is strictly from a trader's perspective, and owes nothing to macroeconomics at all. One of Sally's acquaintances in the financial world interjected, in the middle of one of many ongoing gloomy discussions of the world money scene, the caveat, "Meantime, there's a rally going on." That's really all I'm qualified to pay attention to.