No consensus on U.S. markets

Last month I spent three days at the World Money Show in Orlando, Florida, which is probably the largest financial conference anywhere. It is estimated that more than 14,000 people attended at least one of the hundreds of keynote sessions, panels, and workshops.

This is an international show, with representatives from countries around the world including India, China, Russia, Germany, South Africa, Australia, Japan, and, of course, the United States. I delivered the keynote address on behalf of Canada.

I found a growing awareness of the Canadian success story among American investors. They continue to be mesmerized by China and, to an increasing degree, India. But if attendance at my workshops is any indication, more of them are waking up to the fact that something rather intriguing is happening up there where all those cold fronts originate.

The interest was heightened by a growing concern about the future of the U.S. dollar. There were worries about the greenback last year, but at this year’s show the subject was top of mind, with speaker after speaker stressing the need to diversify globally. Traditionally, Americans have tended to be stay-at-home investo but this year I found them to be much more receptive to the idea of putting some of their money into foreign securities.

Another catalyst for heightened emphasis on foreign investing may have been the lukewarm predictions of several experts who spoke on the prospects for U.S. markets in 2006. They all expect Wall Street to move higher this year but there was no consensus on the extent of the gains. Views ranged from strongly bullish to more-or-less neutral. No one that I heard was an out-and-out bear. Here’s a sampling of opinions.

Steve Forbes, CEO of Forbes and editor-in-chief of Forbes magazine: Forbes is always a favourite at these conferences. He’s an entertaining speaker and his policies appeal to what is predominantly a well-off, conservative audience. His position as editor of Forbes magazine gives his words extra weight. His message was basically that stocks are weak because of Washington’s policies.

“The fundamentals of the U.S. economy are strong,” he said. “We’ve experienced a productivity boom of historic proportions…There is plenty of liquidity – corporate America has $2 trillion in net cash.”

However, investors aren’t committing their money because of government policies and overseas concerns. Iraq and, now, Iran are having a depressing effect on U.S. markets. “The Iranian leaders are true fanatics – it’s a real downer,” he said.

Domestically, Alan Greenspan has left a mess behind, Forbes believes. “The Fed has pumped too much money into the economy in recent years. We’re in the midst of a mild inflation, and the price of gold is the barometer of this monetary disturbance.”

His solution is to stop printing so much money and to rationalize the tax system. “The fundamentals are there for stocks to be 30 per cent to 50 per cent higher,” he proclaimed. “They’re depressed because of the policies in Washington.” The audience gave him a standing ovation.

Ned Davis, president and senior investment strategist of Ned Davis Research, Inc.: The crowd did not give a standing O to Mr. Davis, a highly-respected U.S. market analyst, perhaps because his message was not very inspiring. He pointed out that, historically, U.S. markets do not perform well in mid-term election years, which this is. Going all the way back to the 19th century administration of Benjamin Harrison, he calculated that the average gain in a mid-term election year was 3.3 per cent. The likelihood is that 2006 will be close to average, he said.

The crowd listened glumly as he recited one discouraging statistic after another. Samples:

  • The current price/earnings ratio of the S&P 500 is 19.5. The average is 15.5. So the index is expensive and if the p/e ratio goes over 21, watch out.
  • Corporate profits will be up 6 per cent to 8 per cent this year, which means that disappointments are likely.
  • Housing has become less affordable for the average person so sales are likely to go down.
  • The yield curve has not inverted yet but if it does it will spell trouble.
  • Historically, markets stage a brief rally after the Fed ends a tightening phase but then goes down for six to nine months.
  • His advice: wait for a market correction, which he expects in late summer. Buy then. Stocks will stage a modest rally in the fall.

    Ed Finn, editor and president of Barron’s: Stocks are “fairly valued” at this time but we could see gains of about 10 per cent in both 2006 and 2007. The rally will start when the Fed ends the current round of rate increases. However, a tough election fight in 2008, perhaps between Hillary Clinton and John McCain, could shake the markets starting in 2007.

    Harry Dent, well-known author and president of the H.S. Dent Foundation: We’re going through a demographic bubble which has the potential to drive the Dow to the 14,000-15,000 range this year (it ended Friday at 10,794). However, if that is to happen the price of oil needs to drop.

    “This boom will peak about 2010,” he told the audience. “Then we will see an extended downturn.”

    My overall impression was one of damning the markets with faint praise. I heard nothing that convinced me that U.S. stocks will outperform the TSX in 2006. Apparently many of the attendees came away with the same impression. We could see more U.S. dollars flowing into our stock market this year.

    This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, go to