It's not out of the question to see the Dow hit a few more milestones by the end of the year, says John Dessauer of John Dessauer's Outlook.
Nancy Zambell: My guest today is John Dessauer of John Dessauer Investments. John is a money manager as well as the editor of John Dessauer's Outlook. He's been in this business for quite some time, and he's seen a lot of cycles.
John, we've seen the market in the last few days take a hit. Some people saying it's overvalued. Some people have been saying we're due for a break. But you still have a very positive outlook.
John Dessauer: That's correct. People always say stocks don't go in any particular direction in a straight line forever, and that's true. So we're bound to get some volatility in the market after this nice rally we've had. Every time I look at my screen, it doesn't look to me like we're in any serious trouble.
Nancy Zambell: You mentioned you know employment is definitely improving, even though it's slow and steady. GDP really isn't that bad. So, what do you see in your crystal ball as to why we're going to continue on a steady pace going forward?
John Dessauer: A lot of things have changed since the financial crisis of 2008. They've changed in Europe for the worse. They've changed in China, and that's a mixed story. They've changed here in the United States.
So we seem to be much more in a mode that Gary Schilling, the economist, would describe as a deflationary tendency. I think that's something people have not really registered in their mind. The idea that the Fed has printed too much money is the prevailing thought, and that may be wrong. In fact, the Fed may not have printed enough money to keep us afloat forever.
Nancy Zambell: Please explain to the viewers about what deflation is, and how that can ultimately affect the stock market.
John Dessauer: If you had outright deflation, that would be a very bad thing. That would mean prices going down in real terms, and that would be very bad for the economy, for business, and for the stock market.
To have a "deflationary tendency" is better than to have a problem with inflation. In this environment, interest rates are not likely to go up anytime soon. Monetary policy here and elsewhere in the world is likely to remain quite loose for some period of time.
Under those circumstances, you have plenty of liquidity and central banks at least providing some support to keep economic growth alive. Economic growth is stalled in Europe, but it hasn't really gone into a serious depression kind of thing either.
In China, we've now got growth running around 7.7%, with a government target of 7.5%, and that's really excellent. Here in the United States, we have growth going probably a lot more than what we saw in the fourth quarter of last year-more likely in the area of 2% to 2.5%-which is good.
In the meanwhile, you look at businesses. Their balance sheets are clean, and they've reduced their debts. The deleveraging in business is about over. Therefore, businesses are able to use new technology to become more efficient and to take advantage of the growth in their markets and continue to grow their profits.
In the second quarter, it looks like profits are going to be up something around 4% or 5% over the same quarter of last year.
Nancy Zambell: That's pretty darned healthy.
John Dessauer: It's pretty darned good under the circumstances. Expectations keep coming down, and some companies have run into trouble. We've seen PC sales, for example, go down in the quarter.
On the other hand-overall-earnings of financial companies, manufacturing or retailers, look alright. They're not as bad as anybody thought they might be.
Nancy Zambell: In your last newsletter, you talked about Wharton Professor Jeremy Siegel's forecast of the Dow going to 18,000 by 2014. You said that might actually be too conservative.
John Dessauer: It could turn out to be too conservative, because there are some signs that we may see a mini-burst in corporate spending toward the second half of this year.
That would be because business is not as weak as some of the business managers thought it might be. And it's also because they put off and delayed adopting upgrades to their technology. They've put that off about as long as they can.
Now, competitive pressures have increased, and probably toward the second half of the year, we'll see the results of that. That could give earnings in the second half of the year a boost, which could mean that the Dow could go over 18,000 and still not be in any kind of historically high P/E ratio.
Nancy Zambell: That's amazing! Let's talk about some of the stocks in your portfolio that you're buying for your money management clients. What are a couple of your favorites today?
John Dessauer: One that's definitely on my list is a Vanguard Fund. It's the Vanguard Emerging Markets Fund (VWO).
It is very well managed, but there's something going on there that makes it a little bit more attractive than normal. That is that the folks at Vanguard have decided that Korea is no longer an emerging market, and that Korea is a developed market.
So they are changing the index that they focus on from the Morgan Stanley MSEI Emerging Markets Index to the FTSE, or Financial Times Emerging Market Index. The FTSE excludes Korea.
That fund has been in the process-and it's just about done-of liquidating its positions in $9 billion worth of shares in Korean companies, and redistributing that money in the other emerging markets that the FTSE index follows.
I think that's a good move because-although I do believe Samsung's (SSNLF) a wonderful company-Korea is a developed country and no longer an emerging market like China or India and so on. So I think it's a very wise move.
When this is finished-and it will be done in a couple of weeks-then I would say that fund is really poised to participate in emerging-market growth, where growth is faster than it is in Europe or the United States.
There's a very interesting play for people who would like to have exposure to the emerging markets, and it is a fund that's definitely on my buy list. It trades a little bit above $42 normally, but it has been dipping occasionally below $42. When it does that, then I like to buy it.
Nancy Zambell: Okay, so buy below $42. What else? I know you have some energy and some technology companies, as well, in your portfolio.
John Dessauer: I sure do. Intel (INTC) is a company I've liked for a long time, and the stock hasn't done very much except pay a very nice dividend.
Speaking of that, I think you need to include in your portfolio stocks in companies that have a very definite strategy for growth in the future. It doesn't mean they're going to achieve their goals, but if you have 15 or 20 different stocks in your portfolio, and each one of them has some kind of a strategy they believe will produce future growth, at least some of them are going to get it right.
Then you will end up with a total return-not just dividends, but capital gains as well-that will keep your portfolio well ahead of the market, and well ahead of inflation, or whatever else comes along.
I think it's important to focus on companies that have a clear strategy in place for future growth, and Intel fits that description. Their earnings this year have been down for cyclical reasons, so you can't see the growth at the moment.
But their strategy is to continue to shrink the size of their chips, shrink the size of the semiconductor material they use, and set themselves up for the future in technology, in which we'll use a lot more of these very tiny-you can call them "transistors"-semiconductor products.
You can find similar strategies in other companies, too, including General Electric (GE), which is down as we speak, but had a very good first quarter. And we like emerging markets because we know the growth rate there is going to be faster than elsewhere. So, there's a strategy that includes growth for the future.