Ed Yardeni, the economist who for almost three years said the Y2K computer bug would cause a global recession, jokes that now his forecasts are more modest.
"The 1990s are over," quipped Deutsche Bank Securities Inc's chief US investment strategist, who burnished his reputation after the 1987 stock market crash with a forecast that falling inflation and interest rates would more than double the Dow Jones Industrial Average. Many of his followers have forgiven his Y2K gaffe because of that call.
Now, Yardeni, 51, says the changes in the US economy that drove the Standard & Poor's 500 Index up more than 18 percent a year in the past decade aren't going to repeat.
"He tends to pick up long lasting trends," said Will Braman, chief investment officer at John Hancock Funds in Boston, which manages US$30 billion. "In the early 1990s, Ed said `You know what? Inflation is just not a problem. It's dead, it's gone, and rates will go much, much lower than people expect.'" Yardeni was bucking conventional wisdom at the time, Braman said. By 1998, US inflation had dropped to the lowest in 11 years and 30-year Treasury bond yields hovered near the lowest in 30 years. The S&P 500 peaked in March 2000 after posting 28 percent average annual gains in the previous five years.
Too many investors and strategists still expect those types of gains, said Yardeni in an interview.
Even this year, with the S&P 500 down 8 percent after the first seven months, the average forecast among 15 strategists polled by Bloomberg News is for the index to rise 10 percent.
Such optimism is misguided, said Yardeni, who has charted economics and strategy at Deutsche Bank for a decade. People will have to accept more modest stock market returns, he said.
"The market is going to be earnings driven, and earnings growth isn't going to do what it did in the 1990s," Yardeni said.
In that period, average annual growth in operating profit for the S&P 500 was 10 percent, according to Thomson Financial/First Call, compared with an average of about 7 percent growth from World War II through 1989.
Investors now shouldn't expect corporate profits or stocks to gain much more than 7 percent a year, Yardeni said.
He gives much of the credit for stocks' returns in the last decade to lower financing costs, which allowed companies to save money and boost earnings by refinancing debt.
The decline in bond yields also made equities more attractive and investors roughly doubled what they were willing to pay for a company relative to its profits. The price-earnings ratio of S&P 500 stocks rose to 24 times estimated profits at the end of last year, from 14 times profit in early 1990.
"My style has always been to look at the interactions between all the markets -- equities, bonds, high-yield [corporate debt], commodities," said Yardeni, who has a doctorate in economics from Yale University.
Yardeni refers to his warning that computer malfunctions caused by the year 2000 date change could cause a severe recession as a "crusade" on a "Roswell kind of issue," a reference to the New Mexico site where some people think UFOs touched down.
Still, he defends his actions.
"I was worried," he said. "Partly because some of us were raising these issues, companies took this problem seriously." Merrill Lynch & Co's Arthur Thomas, who headed the Securities Industry Association's Y2K task force and appeared at several forums with Yardeni, said "to raise the alarm was fair." The date change was smooth "because of a huge investment [to update computer systems] and careful planning," Thomas said. By the end of 1999, it should have been clear that the transition would be a "nonevent." Yardeni "never totally came off his position, which turned out to be incorrect," Thomas said.
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