A Bullish View No Longer So Incredible

Jim Oelschlager’s outlook for the U.S. economy doesn’t allow for much wiggle room.

“I see a three-to-five-year economic boom coming,” says the Akron, Ohio-based veteran investment manager. “The best is by far yet to come.”

Corporate earnings growth, he says, is going to be “staggering,” fueled by low interest rates and soaring productivity.

That, in turn, will drive the stock market, promises Oelschlager, whose Oak Associates oversees $9 billion for clients.

As for the record federal budget deficit, he says: “We grew our way out of deficits in the early 1990s, and we’ll grow even faster now.”

Oelschlager is, and has long been, far more optimistic than many of his money manager peers. What’s different today from nine months ago is that more people may be willing to concede that an unabashedly bullish view no longer seems completely outrageous.

Since the bursting of the “new economy” bubble in 2000, the conventional wisdom has been that America was in for an extended period of pain as the excesses of the late 1990s were wrung out of the system. That sentiment was deepened by the corporate scandals that began with Enron Corp.’s demise in late 2001, and by the worst bear market in stocks since at least the mid-1970s.

But since March, the performances of the economy and the equity market have demanded a rethinking of the idea that this entire decade is destined to be largely a bust.

U.S. gross domestic product grew at an annualized real rate of 8.2% in the third quarter, the fastest pace in nearly 20 years. And worker productivity -- the long-term key to economic health -- rose at a 9.4% annual rate in the same period, also a 20-year high.

Perhaps most surprising is that the government’s broadest measure of corporate earnings hit a record high in the third quarter, reaching an annualized rate of $1 trillion before taxes.

The earnings recovery has underpinned the stock market’s strong rebound this year. The blue-chip Standard & Poor’s 500 index is up 20.7% since Jan. 1 and is on track for its first calendar-year gain since 1999.

All told, the economic and market numbers are challenging one popular assumption in particular: that the rally in share prices must be short-lived, quickly giving way to another deep decline.

The pessimistic case has been that stocks are mired in a “secular,” or sustained, bear market -- meaning that, despite periodic rallies, share values are doomed to fall below their bear-market lows reached in October 2002.

The corollary view is that another secular bull market, like the one that held sway in the 1990s, must be out of the question in this decade.

“They’re all saying it can’t be a secular bull market,” says Robert Morris, chief investment officer at money management firm Lord Abbett & Co. in Jersey City, N.J., referring to many of his peers on Wall Street. “Well, I don’t believe that. This market keeps confirming that it is a bull market.”

To be sure, nobody expects the U.S. economy to continue growing at the third-quarter rate. Nor do most investors believe that stocks are poised to repeat their spectacular late-1990s run.

But if the market in the next five years or so could perform even one-third as well as it did in the late ‘90s, it could trounce most of the alternatives.

Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School and author of the 1994 book “Stocks for the Long Run” -- which became a bible for many investors -- says he believes the stock market is capable of producing average returns of 7% to 9% a year over this decade.

Rising 7% a year, the S&P; 500 wouldn’t return to its 2000 record high for at least five years.

But what does that matter, Siegel asks. Investors should be less concerned about what they lost than about earning decent returns going forward, he said.

What’s intriguing to some investment pros is that many of the concerns voiced today about the economy and the stock market are echoes of what was heard in the early 1980s and the early 1990s.

Both of those decades began with recessions and with bear markets. In both periods, pessimists feared that heavy debt loads at the government, corporate and consumer levels would be an ongoing drag on the economy.

Likewise, there was widespread concern that America had lost its creative edge and its ability to generate enough jobs.

Yet economic growth accelerated as both of those decades wore on. And the stock market followed the economy.

Edward Yardeni, chief investment strategist at Prudential Equity Group Inc. in New York, says the corporate earnings trend so far this decade “nearly matches the 1991 through 1994 profile.”

In 2001 and 2002, he says, “industry analysts were forced to lower their [profit] estimates as much as they had to do so during 1991 and 1992,” as companies struggled.

But by 1993, earnings were in a sharp uptrend that continued through 1997.

This year, the dramatic jump in corporate profits has been powered by a number of factors. The Federal Reserve is holding interest rates near 50-year lows, which has slashed many companies’ borrowing costs. The weak dollar also is helping the bottom line of U.S. firms as foreign sales translate into more dollars.

But there is no question that business earnings have primarily benefited from the sharp staff cutbacks many companies made in recent years and by their continued caution about hiring more workers.

The tremendous recent gains in productivity -- which means more output per hour worked -- are flowing directly to the bottom line.

Critics say companies are abusing workers. This, too, was heard in the early 1990s, when the term “jobless recovery” first was used to describe the economic trend.

Yet the early ‘90s gave way to a hiring boom in the latter part of that decade.

This recovery already has lost its “jobless” label. The economy has added jobs for four consecutive months. And though the November net gain of 57,000 jobs, reported Friday, was below forecasts, many economists say it doesn’t change the trend.

When the November report is viewed in the context of other economic reports in recent months, “The main message is that these indicators send a credible message of a pickup in the demand for labor,” said Asha Bangalore, economist at Northern Trust Co. in Chicago.

Many analysts see the productivity gains since 2000 as the most telling sign that the U.S. economy will enjoy healthy growth in coming years.

“That’s where wealth comes from -- rising productivity,” said Allan Meltzer, economics professor at Carnegie Mellon University in Pittsburgh. It’s the key to a rising standard of living, he notes.

Improved productivity isn’t just a function of people slaving away at a faster speed, Meltzer said. He believes that a big reason for the productivity gains of the last few years is that many workers are making far better use of the technology that was introduced in the late 1990s.

Given the huge investment in technology that companies have made over the last decade, it makes sense that there should be a significant payoff in productivity, Meltzer and others say.

The potential downside of the productivity streak is that many companies may have no need to hire large numbers of workers in this decade, meaning that even if job growth continues it may lag previous economic expansions.

For those who are downbeat on the economy, one of the main arguments is that consumer spending eventually will peter out because of subdued job growth. And because consumer spending accounts for two-thirds of the economy, growth overall will be disappointing longer term, some say.

For optimists like Jim Oelschlager, however, that view underestimates the American economy’s demonstrated ability to reinvent itself, overcome obstacles and prosper. Investors who underestimated the economy at the start of the last two decades may have paid dearly, he notes.

Oelschlager said he remains a buy-and-hold investor in his mutual funds, including the White Oak Growth fund. Holding tightly to many stocks was painful during the bear market. After soaring in the late ‘90s, the White Oak fund lost 39% in 2001 and 40% in 2002.

This year, it’s up 47.5%, riding the gains in holdings such as semiconductor equipment maker Applied Materials Inc., financial giant Citigroup Inc. and computer titan Dell Inc.

Why not take profits? Oelschlager said he can’t imagine why anyone would dump stocks now, considering the U.S. economy’s growth pace and, just as important, the recoveries underway in Europe and Japan.

“There is no place in the world that isn’t showing signs of economic boom,” he argues.

Indeed, if investors are looking for what might go better than expected for the U.S. economy in 2004 and beyond, some market pros list the potential for much higher exports, thanks to the weaker dollar. They particularly cite the rise of China and its hunger for the type of productivity-enhancing technology and machinery the U.S. economy produces.

None of this convinces Steve Hochberg, chief market analyst at research firm Elliott Wave International in Gainesville, Ga., that this is a good time to hold stocks.

“In our estimation, this rally is on its last legs,” Hochberg said. It will be shown to be nothing more than a typical rally within a longer-term bear market, he argues.

Investors have gotten carried away with their enthusiasm about the economy, Hochberg says. The result, he says, is that relative to underlying corporate earnings, stock prices are too high given the many risks investors face -- terrorism, for example, or the potential for a run on the falling dollar’s value that could trigger heavy selling of U.S. securities by foreigners.

In short, there is no margin for error in the market, he said.

To many market bulls, the bearish case today sounds mostly like sour grapes.

Optimists say the bears are underplaying the severity of the market decline from 2000 to 2002, when the S&P; 500 dropped nearly 50% and the Nasdaq composite index plunged nearly 80%.

Neither bull nor bear markets last forever. Why wasn’t three years enough for the bears, market bulls ask?

“They got what they wanted, and they still couldn’t pull the trigger to buy” earlier this year, said Doug Sandler, chief equity strategist at Wachovia Securities in Richmond, Va.

The bears missed the turn, and now they want another chance, he said.

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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to: www.latimes.com /petruno.