Investors' Roundtable: Bullish about U.S. economy, markets

A year ago, the nine Minnesota money managers who joined the Star Tribune's annual Investors' Roundtable were confident that 2014 would be a good year for stocks, though not as good as 2013, and forecast broad growth around a number of regions and sectors.

When they reconvened this month and looked out to 2015, we learned that home is now where their hearts are — and wallets, too. The U.S. economy and stock market stand out for their strength right now, and will draw investors from around the world as a result, our panel said.

And a new factor, the collapse in oil prices, finally joining the downward trend of other commodities, also will be a major influence.

Following the 30 percent jump in the S&P 500 in 2013, our panel forecast growth of just 3 percent this year. As of Friday, the index was up about 13 percent. For 2015, the group is a bit more bullish, with a consensus forecast of 7.4 percent growth in the S&P 500.

Our discussion covered a broad array of economic and investment ideas.

Q: With much of the world experiencing slowing growth, is now a good time to add international holdings?

Russell Swansen, chief investment officer, Thrivent: Even if you're investing in U.S. stocks, you often have a significant overseas exposure. So taking the S&P 500 as an example, about 30 to 40 percent of revenue and earnings are earned overseas. So you can get overseas exposure just by investing in U.S. stocks.

Elizabeth Lilly, portfolio manager, GAMCO Investors: The only bright spot in the world today is the United States. You look, our economy is stabilized, and we're actually starting to grow, but Europe's a mess, China's a mess, France and Italy are weak, Japan and emerging markets [are weak]. I think that allocating money into the international markets, based on what you're seeing internationally, is probably not a good bet for 2015.

Erica Bergsland, director of research and trading, Advantus Capital Mangement: In addition to the central bank activity, which is going to be accelerating abroad in the coming year, you also have economies that are going to benefit from a stronger dollar, their exports are going to be more attractive, and the recent downturn in oil prices is also going to benefit many economies, as well.

John De Clue, chief investment officer, Private Client Reserve, U.S. Bancorp: There are ways to play the overseas equity markets in a hedged position through ETFs [exchange traded funds] that are commonly available. When you go offshore, you have to make two decisions. The first is generally the currency, and the second, do you like the market?

Q: What are your thoughts about how far oil can fall and its effect on investing?

David Joy, chief market strategist, Ameriprise Financial: Saudi Arabia has the capacity, financial capacity, to let it drift lower longer than almost anybody would guess.

Craig Johnson, senior technical research analyst, Piper Jaffray: The wind's at our back in terms of the economy. The unemployment rate is coming down, you're seeing GDP improving, leading economic indicators are going in the right direction. That should all benefit a stronger dollar. And as the economy gets better, the dollar should strengthen and equity markets should go along with it. … The big play for 2015 is U.S. equities based upon a strong dollar.

Doug Ramsey, chief investment officer, the Leuthold Group: The commodities cycle rolled over in 2011 and it's going to be a long-term, secular decline … so, in a sense, the surprise is how long oil was able to remain up above $100 [a barrel] and, from a supply perspective, that wasn't good. From a bond investor's perspective, a long-term positive is we don't see a whole lot of risk of commodity price inflation over the next three to five years.

Q: Is 2015 the year when the Fed starts to lift interest rates?

Schleif: There's a strong argument to be made that rates continue to stay low a lot longer than anybody expects. There's a lot of factors that play in the economy that are deflationary. You've also got a turnover on the voting members of the FOMC [the Fed's policy committee], with more dovish members going on and hawkish members coming off.

Lilly: If there's something that prevents the Fed from raising interest rates, it's going to be the fear of deflation, because you raise interest rates and the economy slows, and then you've got a whole mess on your hands. So I personally don't think interest rates are going to go up very much this year.

Q: Minneapolis Fed President Naranya Kocherlakota has frequently warned of deflation. What do you make of his concerns?

Swansen: Deflation is a symptom, not a cause. If you have a lousy economy, you can have deflation. But just because prices are dropping a little bit, the theory is that everybody stops buying things because they think it's going to be cheaper tomorrow. Well, if that really happened, nobody would buy a new iPhone.

Robillard: The most interesting thing happening in economics in this part of my life is the realization that the canon around inflation from the Milton Friedman era in the '70s and '80s is incomplete because so many things have happened that should have caused other things to happen that haven't happened … It could be evolving to a much more benign inflation-deflation environment than we want to accept, and that could be good for investors.

Ramsey: The interesting thing to me with regard to Fed policy is anymore not only do we have to follow the economic data, because the Fed is supposedly data-dependent, but I'd also like to say the Fed is also DJIA- or Dow-dependent. I mean, look at the reaction of what was a tiny correction this fall. [Note: From mid-September to mid-October, the Dow dropped nearly 7 percent.] You had two Fed Bank presidents come out and openly talk about the possibility of another round of quantitative easing. What in the economic data would have supported that?

Robillard: Ignore interest rate forecasts. … No one, including the great John Templeton [an early mutual fund pioneer], has any success forecasting interest rates, and it's not necessary to succeed doing so. So don't worry about it.

Q: Is the U.S. now in the midst of a long bull market?

DeClue: This theme of global capital flows can't be underestimated, and I suspect our market is the best house in the neighborhood with not a lot of choices. And I think it's estimated central banks control about $11 trillion, and there's evidence many central banks are buying equities, and just on a balancing basis, that's got to lead them to the U.S. market. So my suspicion is, irrespective of what the individual investor does or does not do, that there's going to be continued buying interest in our markets.

Lilly: The U.S. economy is in the fifth consecutive year of GDP growth, interest rates are low, Europe is injecting liquidity into their system. Stocks continue to be underowned. Households have $47 trillion in financial assets, and 42 percent are in stocks today vs. 53 percent 15 years ago, and that's when yields were at 6 percent. The P/E today is like 15 times … There's a massive wave of M&A in this country, and I think that's only going to continue with interest rates being low. Companies have a lot of cash on their balance sheets and they need to grow faster than 2 to 3 percent. … We're bullish, and I think that the U.S. economy and U.S. market is where you want to be this year.

Schleif: We're under-owned and nowhere near manic levels of psychology — I mean, you'll be able to tell when you're over-owned. I have a big blowup cover from Newsweek on my wall at work that says, "The Whine of '99: Everybody's Getting Rich But Me." We're nowhere near that level of mentality in the ­markets.

Johnson: When is the last time we've had interest rates this low and the economy getting better? You were back into the 1950s period of time, and back then, from the '50s to the mid-'60s, you made five, six times your money. And if you think just about the whole decade of the 1950s, three quarters of those monthly returns were all positive. … The primary trend of this market is up. And from a sentiment standpoint, nobody believes it. People aren't engaged. An entire generation of investors has been wiped out. That confidence has not been rebuilt yet, and we're nowhere near anything like they were psychology-wise in the 1990s. Nowhere even close. So there's still more runway ahead, from our perspective. We like this, and we think it's the start of a secular bull market, started in 2009, confirmed in early 2013, and we're still in the early innings of the secular bull.

Joy: I do think the stock market is going up next year in the U.S., but if you look at the global economy, it is more highly leveraged now than it was before the start of the financial crisis. … At the same time, you're trying to reflate your economies, you're trying to deleverage. It's a tough, tough thing to do.

Lilly: I'm going to throw in another wild card, which is the [2016] election. That's going to be a wild card for the 2015 economy.

Johnson: It's going to be the third year of the four-year presidential cycle. When I look back 100 years at all those third years, you're up typically anywhere between 10 and 12 percent.

Ramsey: If you throw out a really bad pre-election year in 1931, our numbers are up 15 or 16 percent in that third year. The other odd thing the economy has grown almost a point faster on average in those pre-election years and inflation has been a little bit lower than average in those pre-election years.

Bergsland: At the same time, you add higher valuations, record margins, record share of corporate profits relative to the economy and big transitions from a weak dollar to a strong dollar, and from a strong commodities cycle to a weak commodities cycle. These things can create pitfalls. Stocks probably do offer more value than bonds. But people shouldn't get over their skis in terms of expectations of how well the market can do.

Lilly: Domestically focused with smaller companies. … You'll probably want to take some cash and put it overseas in either emerging markets or European economies as the liquidity that they're trying to pump into the system takes hold, and you probably want to be looking at some U.S. large-cap.

Swansen: A multiasset-class mutual fund that is appropriate for whatever your risk tolerance is, because everybody's risk tolerance is not the same. It would be a mix of stocks and bonds. We would favor corporate bonds over government bonds. And on the stock side, we would favor U.S. large cap stocks and European large cap stocks.

Johnson: Definitely stick with the portfolio approach. … In terms of sectors, I'm seeing the best total return relative strength right now coming out of the consumer cyclical sector. Health care will still continue to be a nice, solid contributing sector. Tech stocks are still looking very good.

Schleif: Tech, infrastructure and transportation, because the one thing that's gone unrecognized, I think, with a lot of this technological revolution is that our infrastructure is so aged.

Patrick Kennedy • 612-673-7926