Knight Sees Brighter Days

08/27/2004 12:00 am EST


Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and

"I spend a lot of energy disputing the notion that Wall Street is just one big casinoand here we are at an investment show in Atlantic City," quipsKnight Kiplinger. In his typical direct and to-the-point style, he offers an "executive summary" of the market's outlook.

"At the Kiplinger organization our mission is to make forecasts, figuring out what lies ahead to help our readers better make plans for their businesses and their personal affairs. We must do a pretty decent job at that, or we would not be in business after more than 80 years. But it’s always challenging. But undaunted, I will start my remarks by hazarding a few predictions. Here’s an executive summary:

  • The US economy will continue to grow over the next year or so at a solid rate of 3% to 3.5%. Growth won’t be choked off by rising interest rates, because the rising rates will be gradual and will still leave rates on the very low side of recent history.

  • Yes, consumers will pull back a bit from their spending binge of recent years, but the slack will be taken up by higher spending by business and higher US exports.

  • Oil prices will remain quite high, but will recede from recent record levels.

  • Job growth will pick up, averaging well over 200,000 a month.

  • The major stock market averages will claw their way back to single digit gains for 2004. Averaging this year with last year’s gainswhich got way ahead of robust corporate earnings growth and you will have two pretty good years in the stock market. Next year should be somewhat better in equities.

  • Real estate prices the gains will slow next year and in some very overheated areas, prices will flatten or even decline a little. Not a bursting of the property bubble, but a slow release of air.

"The US economy is far from the only show in town. We will continue to be the world’s largest economy for years to come. We will also remain the largest exporter to the rest of the world. The US rate of growth will average about 3% a year no mean feat for an advanced nation and the world’s biggest, but far lower than developing nations like India, Mexico, and China will achieve from much lower starting points. So you must invest in the robust growth of other nations.

"You can do it by either concentrating your money in multi-nationals, many of which are traded on domestic exchanges, or you can invest in the fast growing smaller companies through global and international mutual funds, rather than picking your own stocks. We prefer this and suggest that you avoid single country or even single continent mutual funds. Rather, pick funds that spread their money all over the globe. What’s the right percentage of your money to go into foreign equities? That depends on your age, your wealth, and your tolerance for risk. But generally about 15% to 20% of the money you commit to equities (not bonds, and real estates, but equities) would be reasonable to invest overseas.

"Globalization is here to stay and outsourcing is a part of that. There will be occasional setbacks to globalization and free trade. When protectionism flares up and capital flows diminish, and international crises slow down, the gradually knitting together of national economies that broad trend is relentless because the empirical evidence is clear. Free trade and globalization benefit everyone from the poorest in Africa and Latin America to the well-off middle classes in Europe and the US.

"The US, already the world’s most open economy, will benefit the most from this trend, while Europe and China struggle with learning how to deal with openness. In America, we have an enormous head start. We know that an open economy subjects our citizens and our businesses to constant competitive pressure from the rest of the world. We know that openness is a tough game in which to play. But in America, we have had decades to get the hang of it. And we are doing pretty darn well. If you trust in this inexorable global trend as workers, as citizens, and as investors, you will prosper. My best wishes for your success in these challenging, dismaying, but exhilarating times."

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