By Margaret Bliss and John Bugajski
The December 2017 UCLA Anderson Forecast took on a sobering if realistic tone when panelists addressed the financial market outlook for the United States. Guests Christopher Harvey (head of equity strategy at Wells Fargo Securities), Christopher Schwarz (associate professor of finance at UCI Paul Merage School of Business), Ivo Welch (J. Fred Weston Chair in Finance at UCLA Anderson) and Harlan B. Spinner (senior vice president of UBS Private Wealth Management) agreed that one should be wary when predicting the future growth of the GDP and where to invest.
When asked about the stock market’s current exuberance and its future growth, Schwarz disclosed, “The multiple is very high, a historic high. Is it irrational? It is difficult to say while we are sitting up here, but it is not an incredibly crazy number like it was in 1999 … Going forward I think mid-to-single-digit stock market growth is reasonable.” Schwarz anticipates a 5 to 6 percent GDP growth rate over a five-year span.
UCLA Anderson Forecast Senior Economist David Shulman moderated the panel, asking whether passive index investing is wiser than investing in something unprecedented. Welch responded, “I think the best stock market forecast, typically, for mere mortals like us, is to predict it to be not that different than it is now, with a little gross-up over time — numbers between 1 percent and 3 percent. Lots of Nobel Prize-winning colleagues and academics tell me how easy it is to be in tune with the stock market from forecasts, from earnings … I think they are all out of business these days.
“The one thing that I advise friends is, be aware that we had a 2008 that almost everyone seems to have forgotten. If the stock market drops by one-third or one-half, you have to ask yourself if you can still live the same way. In my own portfolio I am relatively cautious.” The panelists agreed on a marginal increase in the GDP, while also erring on the side of caution when projecting economic growth and investments.
When asked which sectors would be underrated or overrated in the coming year, Harvey suggested investors look at volatility in comparison to quality. Low volatility sectors, such as food, beverage, tobacco, utility and media space, should start to normalize and increase in quality. Based on this observation, he suggested that one should invest in iShares Edge MSCI USA Quality Factor EFT (QUAL) and PowerShares S&P 500 Low Volatility EFT (SPLV).
Spinner, meanwhile, suggested that one use common sense and focus on financials: When investing, find the strong economies and allocate one’s equity portfolios to those markets. He identified Europe as a stronger market than the United States and said he has shifted a portion of his own portfolio into European market holdings.
The hot topic of bitcoin as a currency brought about a unified conclusion from the panelists. Spinner’s summary: “Bitcoin will never be currency because governments will not accept it.” He explained that working-class citizens will not accept bitcoin as a form of income for several reasons: it maintains consistent value fluctuations, it doesn’t meet any qualifications that currency currently requires and is in a bubble. Welch believes that despite bitcoin’s current and interim values, its value at the end will be zero. Bitcoin is finite and there is no way to know its true value or when and how it will end.
The UCLA Anderson quarterly economic forecast conference, Bursting Bubbles or Soaring Balloons: Financial Markets in 2018, took place on December 6, 2017. Read the full press release.
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