Investors should be defensive when selecting stocks in 2006, as the specter of an economic slowdown and higher inflation will produce a choppy year for Wall Street.
That was the consensus of four investment strategists scheduled to offer market predictions tonight in Denver as part of the CFA Society of Colorado’s second annual forecast dinner. CFA refers to “chartered financial analyst,” a professional designation given by the Char lottes ville, Va.-based CFA Institute.
“I’m not saying to get out of the market,” said Chuck Hill, chief investment strategist for Veritas et Lux of Ipswich, Mass. “But it’s going to be a tough year.”
Another scheduled speaker, Tim Hayes of Ned Davis Research in Venice, Fla., offered an equally bearish prediction.
He said several factors suggest a flat to down year on Wall Street, including, surprisingly, the Federal Reserve’s expected end to interest-rate increases.
“The market generally declines at the end of a tightening cycle,” said Hayes, chief investment strategist.
Since 1920, there have been 16 instances where the market has declined by at least 5 percent during the six months after the Fed completed a cycle of interest- rate increases, Hayes said.
Two notable exceptions were in 1989 and 1995. In both cases, the yield curve – the spread between short-term and long-term Treasury yields – did not become inverted.
When the yield curve inverts, as it did briefly in December, history indicates that a market downturn and economic recession will soon follow.
“We are looking for something we haven’t seen since 2000: a cyclical decline in the market,” said Hayes. “We are taking a defensive position at this point.”
He suggested several industries that generally hold up well during an economic downturn, including health care, energy and consumer staples.
Hayes expects large-cap stocks to outperform small-caps in 2006, and that value will beat growth.
“Our view is the stock market is close to fair value,” said Subodh Kumar, chief investment strategist for CIBC World Markets. “Look for earnings expectations to come down.”
Justin Dew, director of portfolio services for Standard & Poor’s, offered the most bullish outlook of the panelists.
“We could be in for a bull market if inflation stays low,” Dew said.
However, with the Fed suggesting it is nearly finished raising rates, “there’s a lack of predictability that’s frightening.”
Vinny Catalano, president of iViewResearch, will moderate the discussion.
Catalano, who considers himself a short-term bull and a long-term bear, said “structural imbalances” such as the U.S. trade and budget deficits are reasons for concern.
He said the nation’s flat wage inflation for workers, a tepid housing market and political instability in the U.S. and abroad set the stage for “one heck of a mess.”
Staff writer Will Shanley can be reached at 303-820-1260 or wshanley@denverpost.com.
Economic outlook
Event: CFA Society of Colorado’s second annual forecast dinner
Time: 5:30 to 9 tonight
Site: Coors Field
Admission: $100 for nonmembers and $75 for members, available online at www.cfacolorado.org
