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2001: A Better Year Than Many May Expect
So, the year 2000 is finally over. We got through all the Y2K foolishness at the beginning of the year, had a very hot economy for much of the year, with economic growth continuing to exceed economists expectations. The stock market got off to hot start, but unlike the economy, which did not show signs of slowing until the final month or two of last year, reached its highs before the end of the first quarter and never quite seemed to recover. In fact, it was the market's first clear-cut losing year across the board since 1990.
In the latter part of the fourth quarter, the economy began to show significant signs of slowing, and just as optimism ruled the roost for much of the year, you could almost smell the pessimism beginning to build. As of this writing, the pessimists certainly have the upper hand and the gloom-and-doomers are out there predicting the near-end of the American economic system as we know it. Of course, that is all foolishness.
I think we're going to be pleasantly surprised this year. I think the Fed is going to help us a lot; Chairman Alan Greenspan does not intend to have his brilliant 13-year record tarnished so late in his career. He does not want to be left with the legacy of being the man who killed the goose that was laying the golden eggs by keeping interests rates too high too long. I think the Fed will start cutting interest rates fairly soon and fairly aggressively. Perhaps by as much as a half point this month, whether it is a quarter of a point before their end of the month meeting, and a quarter of a point at that time, or a complete half point cut on January 31.
I think the Fed is likely to continue to cut rates during not only the first half but throughout the year. I think at least a point, and perhaps a point and three quarters, could be the total by the end of the year; that will slowly but surely act as a good stimulus to a slowing economy, just as their raising rates the previous year acted to slow the economy.
Before we go any further, a word about the word recession. People will start indiscriminately throwing that word around now, but the real definition is, 'two consecutive quarters of negative Gross Domestic Product.' That's it. That's a recession. And a slowdown ISN'T A RECESSION.
That's what we're in. A slowdown. Most economists, correctly or not, felt that the 6% and 7% rate of growth that economy achieved early last year was just too high, and that eventually things would have to cool down-that's what the Fed set out to do by raising interest rates. They accomplished their objective and the economy is likely to grow at a slower pace this year. Probably somewhere in the 2-3% area. That will constitute another term that you'll hear a lot about, the so-called "soft landing." All the term "soft landing" means is that the economy was able to slow without nose-diving into a full-blown recession. I think Greenspan will be successful in accomplishing that.
What we have is an economy that is slowing, and will produce slower sustainable growth this year. Inflation will continue to be under control because economic pressures simply won't be there. Energy prices that are already subsiding will continue to be moderate, despite our cold weather, and the outlook is actually pretty decent.
As for the market, it was certainly priced for perfection in the first quarter of last year. When we failed to live up to the expected perfection, the market fell apart. Corporate earnings this year will still be to the plus side, though modest. The key is that the market is no longer priced for perfection. So, while corporate earnings are not likely to advance to the double-digit rates of previous years, they do not necessarily have to sustain a market that has been through a fair amount of pain.
The bottom line; don't believe the gloom-and-doomers-a slowdown is not a recession, Greenspan does not want his legacy tarnished, and the market will probably do better than most people expect. Whether it all comes true remains to be seen, but if you keep checking this space each week, we'll keep you up to date as we help you analyze what's going on with you and your money.
(Tom Butenhoff is a First Vice President with J. E. Liss and Company, Inc.
in Milwaukee. The views are his, and not necessarily those of Liss
Financial Services or the Job Connection/Hiring
Network.)