The floor is still covered with tinder waiting to be set ablaze. But no one seems to want to strike a match to get it going.
And until someone starts that fire, the US economy could remain in the malaise affecting it for more than a year.
That’s the assessment of Frank Cappiello, the president of a Baltimore investment management firm who again offered his economic insights at the annual Bottom Line Breakfast of the Milwaukee School of Engineering’s Rader School of Business.
It was a year ago that Cappiello told the MSOE crowd that interest rate reductions would, sooner or later, stimulate the economy. Related to that, he said, was the money supply, which he likened to tinder.
"The first spark will light the fire; but we don’t have that spark yet," he said at the November 2001 breakfast.
Fast forward to November 2002, and Cappiello says that interest rate cuts have helped keep the economy alive, with money available at the lowest cost in 50 years – and that was before the Federal Reserve dropped rates by another half a percentage point.
But no one has ignited the tinder yet.
Someone better light that match if Cappiello’s November 2001 stock market prediction is to be realized. That prediction: The Dow Jones Industrial Average would reach 11,000 by the end of 2002. Well, his Nov. 4 visit this year, co-sponsored by Fiduciary Management, still presented him with two months for the Dow to reach 11,000, he noted.
The bear market "is probably ending," he said, adding that it appears stocks bottomed out a few months ago.
But unknowns remain, including the prospect of war, the relatively high cost of oil and the 2004 expiration of Chairman Alan Greenspan’s term with the Fed.
This recession has been "like none I or my peers have ever seen," Cappiello said, noting the continuation of consumer spending but the dry-up of capital spending by businesses.
That capital spending, which basically stopped 2-1/2 years ago, "is a little tougher to cure" than a lack of consumer spending, he said.
"The perception of the future is still pretty gloomy," he said, noting that the American people do not believe the economy is heating up.
Despite that gloominess, Cappiello was optimistic, saying several factors that lead to a bull market should come into play, including: (1) mood; (2) money, which has to be cheap and abundant; (3) momentum; (4) and mergers, which promote efficiency. "We think all of this is on the way to being resolved, and we think that we’ll see positives," he said.
On the money front, Cappiello called the $2.3 trillion sitting in money market funds "money on the sidelines." While it’s on the sidelines, it’s not earning much, due to low interest rates. And that’s a situation investors won’t tolerate for long, Cappiello suggested.
"This money is going to do something, and we think it’s coming into the market," he said.
There’s another very positive factor that should help the economy for several years, he said, noting that the United States has "the most ideal population of any country in the industrialized world."
Baby Boomers may represent a third of the US population, but their spending accounts for two-thirds of consumer spending – a very positive situation for the next eight to 10 years, he said.
Cappiello discounted the impact of what may appear to be negatives for the economy. Those include:
1) Low price-to-earnings ratios shouldn’t be seen as a negative because people buy stocks based on expectations that earnings will go up. "Price-to-earnings ratios have no relationship to a stock’s attractiveness," he said. The US economy should see greater growth, relatively low inflation, less unemployment and a rising Dow in 2003, he said.
2) Like Great Britain and other nations that experience terrorism, the US will learn to cope with such violence, with a siege mentality giving way to a more normal state, "but a different kind of normal." Terrorist attacks in the US or against US interests will continue, but they will be smaller and less impactful, Cappiello predicted, pointing to successes against terrorist elements around the world.
3) Increased security costs won’t drag down productivity. Corporations, on a race to cut expenses, will see increased profits.
Speaking before the Nov. 5 election, Cappiello said a return of Republican control of the Senate, which has happened, would lead to tax relief "that we think would be a positive" for the economy.
Cappiello, a longtime panelist on the PBS television series Wall $treet Week with Louis Rukeyser and now on Rukeyser’s Wall Street show, is president of McCullough, Andrews & Cappiello, a Baltimore-based investment management firm that handles assets of more than $1 billion.
Nov. 22, 2002 Small Business Times, Milwaukee
