Battipaglia Turns Cautious on Stocks

02/23/2007 12:00 am EST


Joe Battipaglia

Market Strategist-Private Client Group, Stifel Nicolaus

Investment guru Joe Battipaglia sees signs the good times of the last few years may be drawing to a close, and it might get a lot tougher for investors to post big gains in stocks...

Joe Battipaglia's 2007 Predictions:

2007 High 2007 Low 2007 Close
Dow Jones Industrial Average 13,500 11,300 12,900
Standard & Poor's 500 1,540 1,280 1,470


Favorite Stocks for 2007:
Microsoft (MSFT)
Imclone (IMCL)

See all Top Pros' predictions for 2007

From the "Winners and Losers in 2007" workshop at The World Money Show Orlando 2007:

The next five years will be much more difficult than the previous five years, because of the general framework in which we as investors have to operate.

When you look at their market value, stocks have performed very well in this particular stimulative environment.

[But] I would argue that what with home prices coming down [we are seeing] a growing defensiveness by the consumer. There is over $1.5 trillion worth of adjustable-rate debt floating around out there. The subprime market is getting close to $2 trillion in size. These are very large numbers in a mortgage market that totals approximately $9 trillion.

And as all this unfolds it will force [consumers] to curtail their use of credit. It will tamp down the demand for goods and it will give rise to an increase in credit requirements. In fact a survey of senior lending officers around the country [showed] there has been over a 15% increase in banks that have raised their standards for lending. And I think it has a spillover effect to some degree on the economy.

Banks have been one of the best asset classes to own for the last several years, because they had mortgage originations, they had fee income and they were able to squeeze out a spread between what they lend and what they pay. But that's all disappearing.

[Banks'] earnings in the fourth quarter of last year were up only 4%. This is down from close to 15% in the previous 25 quarters. So, during a time of great recovery in the economy, banks are creaming it, and banks are a big percentage of the Standard & Poor's 500.

[On] the fiscal side, we have now started to talk about how much and on whom we are going to raise tax rates. And right now dead center in the target is the other great performing stock group, oil stocks. Not only is the federal government, but the states are now looking to create windfall profit taxes on these companies.

So the environment around the stock market has gotten more treacherous. Now it is not going to be a disaster. But the leadership in the stock market will get narrower, and the risk to you the investor is the highest it has ever been, because you are not being paid to take risk.

So, maybe we are at an inflection point where growth stocks, which are less sensitive to the economy, will outperform value stocks after a very long multiyear cycle of outperformance by value. You will want to skew your equity portfolio towards growth and you want to skew it towards bigger versus smaller, in order to ride out the bumps and bruises of 2007.

I think the market will have a correction here and it will be of the 7% to 10% variety. But I'm not running for an exit; I'm just saying that 2007 could be more like 2005 than 2006 potentially.

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