Stocks Get Policy Boost, But Economy Lags: Experts
CNBC.com Senior Writer
Positive developments out of Washington have stocks on a slow road to recovery even as the economy may continue to struggle, a panel said on CNBC.
Recent moves by the Treasury Department and Federal Reserve scored mostly praise from the experts who spoke Tuesday morning. The White House garnered some praise as well for creating a better environment for the banking system to regain its footing.
The economy, though, is expected to lag though some areas, such as housing, are showing recovery, according to Abby Joseph Cohen, senior analyst at Goldman Sachs; Paul McCulley, managing director at bond fund manager Pimco; Bob Doll, vice chairman at BlackRock; and Vanguard Group founder Jack Bogle.
Here's a rundown of their positions:
"My sense is that the reaction to the new sheriff and his new posse is finally turning positive," Cohen said. "The new team has been in office just about two months and we're seeing the various pieces of the puzzle coming together."
The panel members mostly praised Treasury Secretary Timothy Geithner for the plan he unveiled Monday to use $100 billion in government bailout money to clear toxic assetsfrom bank balance sheets.
"I think the markets have been waiting for critical mass out of Washington," McCulley said. "I was encouraged by yesterday."
Doll said he too was "very encouraged by what the Fed did" in its move last week to buy up distressed mortgage assets but said the public will need to be patient as "policy takes a long time to affect the economy."
But Bogle expressed caution over the dual plans, saying "there are a lot of unanswered questions."
"Wall Street, having created this awful mess, may be in a position to profit from it," he said.
Pimco is expected to be a buyer of some of the distressed assets, and McCulley said it's important to help those who can help ease the banking crisis.
"We have to separate those who got us in the mess and those who have risk capital that they're willing to put to work, levered alongside Uncle Sam, to help clean up the mess," he said. "It's a joint venture to bring back leverage away from the banking system in order to have these assets valued at a higher level. Essentially, Washington is getting involved in the shadow banking business."
Monday's massive rally in stocks spread cheer throughout the investment community that the major indexes have formed a lasting bottom.
Investors, though, were encouraged to take a long view of the market, which is likely to still move in fits and starts until the economy stabilizes.
"We all know this is a bottoming process, or so it seems," Doll said. "I think if you use the word 'process' your investment policy should follow the same path. ... I don't think you want to sit on your hands with maximum reserves on the sidelines. Slowly but surely you should put your money to work."
Cohen said Goldman is pegging fair value for the S&P 500 at 900 in the near term and 1,000 over a 12-month period.
"It takes a lot of nerve to move into the market when it is looking as distressed as it was two weeks ago, but long-term investors know that is exactly when they should be moving in," she said.
Bogle sounded a note of caution about declining dividends that will hit share prices, but Doll said he sees strong room to the upside.
"When we're in a waterfall decline followed by a foundation-building bottoming process, you're going to get big moves in both directions as we try to set a new foundation, from which hopefully we can move higher if and as the economy improves into 2010," he said. "We don't think this rally is over by any means."
Recoveries in the economy are almost always preceded by a rebound in stocks, and that isn't expected to be any different this time around.
"I do think that we will see a pickup in consumer spending over time," McCulley said. "It's important to remember that the financial markets will turn well before the real economy does."
Of the government moves to help the economy, McCulley said, "They're making a coordinated effort to turn deflationary swamp water into reflationary wine."
Cohen said the Obama administration should be most focused on job creation so people can start spending again and helping companies regain lost ground.
"Our middle-income households just were not keeping up, and in their attempt to keep their standard of living going reduced their savings rates dramatically and ultimately took on too much debt," she said.
"One of the key things I think we need to make sure we address some of these long-term issues is to make sure we can create the jobs we need, make sure we do put in place the infrastructure and equipment we need for all of our workers to be as productive as possible, and this of course requires long-term investment."
Improvements in housing and some other economic metrics have inspired hope that the economy is also in a bottoming process, though the timetable for recovery is uncertain.
"We've got a while to go on the economy. The market's going to anticipate that ... and could well turn a year and a half to two years before the economy does," Bogle said. "That may be what we're seeing now. It's going to be a tough economy for a while, I don't think there's any question about that."