Face-off over Dow record: Believer vs. skeptic
New York • Something strange has happened to investors this year. Ever since the financial crisis in 2008, many had worried that the next big disaster was waiting around the corner, ready to clobber them.
But even the gloomiest money managers turned cheerful in January, when the Dow Jones industrial average got off to its best start to any year since 1994. The stock market has continued climbing, sometimes shakily, in the face of government budget cuts that threaten to hamper a sluggish economy. With the Dow reaching an all-time high of 14,253.77 on Tuesday, it seems like the pessimists have been chased into hiding.
The Associated Press asked two experts for their thoughts on the market's rapid rise. One is a bullish optimist, James Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis. The other is a skeptic, Jeffrey Kleintop, the chief market strategist at LPL Financial in Boston.
Here are excerpts from the interviews, edited for length and clarity:
AP: What do you make of how well the market has done this year? The economy is still plodding along. Are you concerned that the market has climbed too high, too fast?
PAULSEN: We haven't seen these spectacular one-day gains of 3 percent this year. We're just methodically marching ahead. I think that's a good sign.
I've been bullish for a while. If anything, I think stocks have been underpriced for some time. During this recovery, we've been plagued by the idea that the world was going to end, whether it's Greece, the U.S. debt limit, whatever. That's been the story: Armageddon is coming every year. So the market was lower than it should have been.
Today, there are more things working than before. The labor force is growing, banks are making loans, home prices are rising. China is picking up again. Europe is calm. So many things are getting better, and that's driving people to equities.
KLEINTOP: It's an interesting year, for sure. A lot of dangers are off the table, and that's allowed valuations to rise. We have plenty of other risks, though. The economy is growing at a very slow pace. Wages are low. When people have little income, there's not much to drive economic growth higher or drive revenue for companies.
Our view at the start of the year was that we'll still see low to modest single-digit returns for the market in 2013. That's still our view. In other words, it wouldn't be a surprise to see the stock market end the year exactly where it was in late January.
That's similar to the pattern over the past few years. We charge up to these milestones then retreat. In 2011, the Dow broke above 12,000 in February but didn't remain above it till that December. Last year, the Dow reached 13,000 in February but couldn't remain above it till December.
AP: Corporate profits appear to be growing at a much slower pace. How does that play into your outlook?
PAULSEN: Corporate profits are 15 percent plus higher today than in 2006. Sure, earnings are growing slower but so what? The key is the valuation, what people are willing to pay for those earnings. And valuations are starting to rise because people are getting more confident.
We've already produced the great bulk of earnings that we're going to get in the cycle. But we can still break through (the Standard & Poor's 500 record of) 1,565, and touch 1,700 with very modest earnings growth. I think we're going to have 15 to 20 percent total returns in 2013, with dividends, in that ballpark.
KLEINTOP: I think earnings expectations have to come down a lot, especially for the second half of the year. The current expectation is for 10 percent earnings growth in the third quarter and 13 percent in the fourth. I think they're a bit too high. Maybe we'll see about half of that. It's hard to get (people to pay more for every dollar of earnings) if earnings estimates keep getting cut.
The trailing 12-month price-to-earnings ratio is 14.8 right now. I'm not a bear, but it's hard to see how it can break above that level if earnings estimates are coming down.