Bull: Market momentum now builds

Charles Kadlec is as optimistic about the future of US financial markets as he has ever been.

Mr. Kadlec, managing director and chief investment strategist for mutual-fund firm J. & W. Seligman & Co., New York, sees all major stock indexes posting double-digit gains in 2002.

At the least, that would put the bellwether Dow Jones Industrial Average up to about 12000 points by year's end. The Dow ended 2001 at 10021.50.

That's not all: Just to underscore how bullish he is about the long-range prospects for the US stock market, Kadlec still expects the Dow to reach the 100000 mark by about 2023.

That lofty prediction is three years later than the year 2020 he forecast in his 1999 book, "Dow 100,000: Fact or Fiction."

When will the stock market begin to climb, after its downward swoon in recent years? Soon, and at least by the second half of this year, says Kadlec.

"Investors who are forecasting a slow recovery are making the same mistake they made a few years ago," he says.

It's a group-think error. At the end of the 1990s stock boom, many people invested heavily in technology. Now, they are entirely avoiding stocks. Either way, "they put all their eggs in one basket," Kadlec says.

"Consensus forecasts are calling for real growth [adjusted for inflation] to be about 2.5 percent in 2002," he says. "If true, that would be the second-slowest recovery since World War II. But the odds are that we will have a much higher [rate of] growth," which will propel the stock market upward, he says.

Historically, the US stock market tends to rise about 11 percent annually, he notes. Gains are particularly impressive when tax rates are dropping, as is currently the case.

Corrective actions are already under way to lift the giant US economy out of recession, says Kadlec. They include lower energy costs, which will benefit businesses and consumers, and the lower tax rates that are being phased in.

Looking ahead, Kadlec sees "a return to price stability," which will aid hard-pressed consumer firms, plus freer trade policies, which will benefit global growth.

The US currently has an average tariff rate of about 2 percent on imports - one of the most open trade policies in the world, according to Kadlec. And China, an increasingly important trade partner for the US, has recently begun to lower barriers to trade on many goods and services, he says.

Despite some protectionism around the world, "the global momentum towards freer trade is on track," Kadlec says.

Still, two factors, he adds, could threaten recovery:

• Event risk. Another terrorist action in the US, he says, could seriously unsettle consumer sentiment and throw off growth projections.

• Monetary risk. The Fed, he says, must provide enough liquidity (money) to finance future economic growth. Interest-rate reductions by themselves will not do the trick, he says, citing Japan, which has repeatedly lowered rates with only a minimal impact.

Kadlec believes restrained growth in the nation's money supply has been one of the primary culprits in the recent downturn. Still, the stabilizing of global commodity markets, such as gold and oil, suggests the Fed has begun to meet a global demand for US dollars, he says.

"Investors should not be trying to time the current market," Kadlec says. Rather, he says, they should follow time-honored strategies. "If you need money in the next year, keep a large position in cash.

"If you have a time frame of five years or more, have a well-balanced approach." Strike a balance between growth and value stocks, he says.

If you have an especially long time frame, say in excess of five years, invest in mid- and small-cap stocks, where growth tends to be most pronounced, he adds.