What lays ahead in 2005 for the U.S. economy and investment markets?
As we move into 2005 the general “consensus” among economists and market mavens alike is that 2005 should be a year of moderate economic growth in the U.S. and throughout the world. In fact the highly regarded UCLA Anderson Forecast calls for “solid but not spectacular growth.”
Citigroup recently increased its earnings estimates for the S&P 500 for 2005 and 2006. They have raised earnings for 2005 to $72, which is higher than their prior outlook of $70.25. Still, the revised figure is lower than average analysts’ estimates of $73.19, according to Reuter’s data.
The investment bank also raised its earnings growth outlook for 2006 but still sees it at a rate lower than the previous year. Citigroup now expects earnings per share to rise 6.3 percent in 2006, up from its previous forecast of 5 percent.
Assume for a moment that Citigroup is right and that earnings are $72.00 for next year. At 1250, which is our target for year end 2004, the S&P would start the year trading at 17.36 times 2005 earnings. Not exactly cheap, but by recent standards, maybe not wildly expensive either. It is down from a P/E of over 40 a few short years ago. We hate to be redundant, but the market is still more expensive than we are truly comfortable with, for this stage in the cycle.
But if the mavens at Citgroup are right it should translate into good, but not spectacular, stock market performance. Most market mavens seem to be calling for 5 to 7 percent growth from current valuations. Here are the forecasts from 12 major Wall Street firm’s market strategists, as reported by Barron’s on 12/10/04.
| Strategist | Firm | Dow | S&P 500 | 10 YR Bond | Best Sector |
| Forecast | Forecast | Forecast | Forecast | ||
| Abby Joseph Cohen | Goldman Sachs | 11800 | 1325 | 5.00% | Tech |
| James Paulsen | Wells Capital Management | 11500 | 1325 | 5.75% | Tech |
| Jason Trennert | ISI Group | 11250 | 1325 | 4.50% | Tech |
| Chip Dickson | Lehman Brothers | 11100 | 1300 | 5.00% | Industrials |
| Tobias Levkovich | Citigroup Smith Barney | 11700 | 1300 | 4.90% | Heath Care |
| Abhijit Chakraboritti | JP Morgan | na | 1275 | 5.80% | Industrials |
| Tim Love | Duetsche Bank | 11350 | 1275 | 5.50% | Industrials |
| Henry McVey | Morgan Stanley | na | 1250 | 5.00% | Industrials |
| Richard Bernstein | Merrill Lynch | 10915 | 1205 | 3.85% | Utilities |
| Thomas McManus | Bank of America | 11000 | 1200 | 5.50% | Energy |
| Francois Trahan | Bear Stearns | na | 1200 | 5.00% | Heath Care |
| Gary Gordon | UBS | 10500 | 1100 | 5.50% | Financials |
Interest rates should rise in the U.S. but not enough to cut off economic and market growth. Bill Gross of PIMCO is forecasting a 10 year Treasury yield of 4.5 percent by EOY 2005, vs. 4.16 today; and a 2.5 percent Fed Funds rate vs. 2.00 percent today. The 12 “strategists” listed above also provided their forecasts for the 10 year Treasury bond yield. Their “average” yield forecast is 5.1 percent for EOY 2005.
The same issue of Barron’s ran another article on 12/10/04 called “How will 2005 Rate for Bonds”. It featured different analysts than those listed above. In many cases the analysts are from the same firms, but have entirely different opinions on where bond yields will end the year.
The strategists that are highlighted in RED differ significantly from their own counterparts within the same firm. Compare estimates from both tables to see what we mean.
| 2005 Interest Rate Forecasts | |||||
Strategist |
Company |
Fed |
Fed |
10 Yr. |
10 Yr. |
| R. Berner/D. Greenlaw | Morgan Stanley | 3.00 | 4.00 | 5.00 | 5.00 |
| Michael Cosgrove | Econoclast | 2.75 | 3.00 | 4.50 | 4.50 |
| Bill Dudley/Jan Hatzius | Goldman Sachs | 3.00 | 3.50 | 5.00 | 5.00 |
| Jim Glassman | J.P. Morgan Chase | 3.25 | 4.00 | 4.50 | 4.75 |
| M. Harris/J. O’Sullivan | UBS | 3.00 | 4.00 | 5.30 | 5.50 |
| E. Hyman/N. Lazar | ISI Group | 2.50 | 2.50 | 4.00 | 4.00 |
| Mary Ann Hurley | D.A. Davidson | 2.50 | 2.50 | 4.25 | 4.50 |
| Paul Kasriel | Northern Trust | 2.50 | 3.50 | 4.60 | 5.05 |
| M. Levy/P. Kretzmer | Banc of America Securities | 3.00 | 3.50 | 4.60 | 4.80 |
| Paul McCulley | Pimco | 2.50 | 2.50 | 4.50 | 4.75 |
| P. McTeague/ S. Stanley | RBS Greenwich Capital | 3.25 | 4.25 | 3.90 | 4.20 |
| D.Rosenberg | Merrill Lynch | 2.25 | 2.25 | 3.80 | 4.10 |
| J. Ryding/C. DeQuadros | Bear Stearns | 3.25 | 4.50 | 5.40 | 5.75 |
| Neal Soss | Credit Suisse First Boston | 3.00 | 3.50 | 4.65 | 4.90 |
| Brian Wesbury | Griffin, Kubik, Stephens & Thompson | 3.25 | 4.00 | 5.60 | 6.10 |
| AVERAGE FORECAST | 2.86 | 3.40 | 4.63 | 4.87 | |
| MEDIAN FORECAST | 3.00 | 3.50 | 4.65 | 4.90 | |
| 12/10/04 ACTUAL | 2.00% | 4.15% | |||
The U.S. dollar should continue to fall in value relative to other major currencies, especially the Euro. We have seen targets as extreme as 1.42 to 1.55 against the Euro vs. approximately 1.32 today.
Gold prices should advance. The most bullish forecasts are calling for prices to be significantly north of $525 per ounce by EOY 2005. However there is a bearish camp that is forecasting gold will fall back below $350 before the EOY 2005.
Oil prices will hopefully stabilize or continue their downward drift. Optimists see oil at $30 per barrel by the end of 2005. Pessimists are calling for $50. OPEC is currently considering trying to stabilize prices at around $35.00 per barrel for the 7 types of oil they commonly produce.
Opinion seems to be split as to whether or not China can cool its economic growth and enjoy a “soft landing”. If they do, commodity prices should moderate. Most “mavens’ see China’s stock market cooling off in 2005. Bear’s are forecasting a significant drop. Bull’s are forecasting modest positive performance for 2005.
Japan may finally be getting some traction in its economy after 14-15 years of recession. However, their 3rd quarter GDP growth rate was recently revised downward from .3 percent to an even more anemic .1 percent. They are facing the stiff headwind created by the Yen rising vs. the Dollar.
Europe has a long way to go to get its act together and it isn’t helping that the Euro is appreciating against the dollar.
The debate is still wide open as to whether or not the U.S. and especially California are experiencing a “real estate bubble” and whether or not that “bubble” will burst. UCLA’s latest forecast says that “California is in a housing bubble, noting that prices have gone up 60 percent since the late 1990’s.” Yet the UCLA study also says that, “Home prices are not likely to collapse. In previous cycles prices haven’t actually fallen, but stayed flat for several years.”
Does that about cover the landscape of economic predictions?
Oops, we forgot. There will be “free elections” in IRAQ in 2005. The “war on terror” will continue.
At the end of the year we can all look back and see how accurate these “consensus” opinions turn out to be.
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