By Deirdre Brennan
Industry experts gathered in midtown Manhattan last week to discuss their predictions for the New Year. A few topics covered by the panel, which was organized by the New York Society of Security Analysts, were a market correction, an economic slowdown and oil and gold prices.
Market Correction: Just How Big Will It Be?
Most industry experts are expecting some sort of a stock market correction in 2006, but where they differ are in their predictions as to just how big this correction will be.
Mary Ann Bartels, director of global equity trading strategy at Merrill Lynch, believes that the market may undergo a "substantial" correction in when measured from peak to trough on an intra-year basis.
"It will likely be around 20%, but hedge funds could push volume up, which may lead to a correction as high as 25%," said Bartels.
Others on the panel were slightly more tempered with their predictions. Timothy Hayes, chief investment strategist for Ned Davis Research, believes there will be a correction starting early in the year "somewhere is excess of 10%."
In a follow-up interview, Jason Trennert, a senior managing director and chief investment strategist at ISI Group, who also partook in the panel, said he thinks Bartels' 20% prediction is "unlikely because of the low level of interest rates and very restrained valuations."
Just How Slow will the Economy Grow?
While the industry consensus is that the economy will grow by approximately 3.6%, Hayes is more cautious, predicting around 3% growth.
Meanwhile, Peter Hooper, chief U.S. economist at Deutsche Bank Securities, is slightly more optimistic than Hayes, expecting to see the U.S. economy grow around 4% in the first quarter, falling to between 3-3.5% by the end of the year, due in part to a slowdown in the housing market.
Trennert agrees with Hooper that the housing market will have a big impact. "Housing in '06 is the biggest marginal change that will conspire to slow the economy down," he said, adding that a rise in oil prices will also add to the deceleration. Trennert predicts that the economy will slow to 2.5-3% by end of the year.
"From my perspective, the slowdown in the economy is what we need to get the Fed out of the way," said Trennert.
Beginning of a Bull Market in Commodities?
In addition to Bartels' predictions of a 20-25% correction in the stock market, she believes that we are at the beginning of a commodities bull market. She thinks that in the long-term, oil will reach $85 a barrel and gold will reach $600 an ounce. Her favorite sector is energy, though she warned that it will be volatile and cautioned people to look at it long term. She also said that "telecoms may be a good place to park some money."
She also predicts that hedge funds will go long the S&P 500, "so we think that there is some room for hedge funds to put money into the market," she said, adding that just last week hedge funds built a minor long position in the S&P 500.
Meanwhile, Hayes, who favors value over growth stocks, is bullish on healthcare, consumer staples and resource stocks, while he is bearish on consumer discretionary stocks and financials.
'Hedge Funds Aren't As Hedged As They Used To Be'
"There may be a shakeout in the number of hedge funds," said Bartels, "but the amount of money in the asset class will remain the same."
She also said that hedge funds are starting to act more like mutual funds, and mutual funds are acting more like hedge funds. "Hedge funds aren't as hedged as they used to be," she said.
Trennert, along with the other panelists, predicted that shareholder activism will also be a hot topic in 2006. "Hedge funds will go elephant hunting and put pressure on as shareholder activists," he said.