The dot-com boom carried the 1990s, and the housing market then became the hot investment craze. However, now that the housing bubble is deflating, if not bursting, what’s next? Local financial management consultants are cautiously looking back into the stock market for investment opportunities. "Our projection for corporate earnings in 2006 is an increase of 7 percent," said Scott Jenson, a financial consultant in the Milwaukee office of St. Louis-based A.G. Edwards & Sons Inc.
The S&P 500 Index as a whole looks like it will be profitable. However, there will be sectors that expand while others are compressed, Jenson said.
Michael Sadoff of Milwaukee-based Sadoff Investment Management LLC, has informed his clients to keep an eye on the Federal Reserve Bank.
"Going back to the 1920s, the Federal Reserve usually stops raising rates about two months after the market peaks," Sadoff said. "Historically, it has taken 10 months for the market to fall again and correct itself."
The raising of interest rates causes the economy to slow down, which causes the stock market to fall, Sadoff said. Usually, after the Federal Reserve starts lowering interest rates, the market bottoms out and then starts to pick up again, he said.
Sadoff believes the market peaked sometime in late 2005 and that the United States is now experiencing the backside of a peak in the market and economy.
"I would not be surprised if the Fed stops raising rates early this year to the middle of the year," Sadoff said. "They will realize they have gone too far. Next year, it bottoms out, and then picks back up again later next year."
Although they are looking at the stock market to invest in 2006, many financial consultants say they are not expecting exciting returns.
"We think it is going to be a difficult year to make money in the stock market," said Bruce Bittles, chief investment strategist for Milwaukee-based Robert W. Baird & Co. "(Investors will) have to be in the right sector, like last year."
Also, like last year, Bittles expects that energy stocks will outperform all other sectors, with the health care sector close behind.
Energy stocks are the best bet, according to Bittles, because oil prices will remain high, given a stable global economy.
Health care stocks typically outperform in the second year of a presidential cycle, which the United States is currently in, Bittles said. However, this time, the aging population is what is causing health care to continue to be a solid sector for investing, he said.
Sadoff Investment Management is looking to heavy machinery stocks, including Caterpillar Inc. and Cummins Inc., for growth, because they do well with the help of international sales and have been rebuilding New Orleans after Hurricane Katrina, Sadoff said.
Sadoff said another sector that could generate solid investment returns is medical equipment manufacturing, including St. Jude Medical Inc. and C.R. Bard Inc.
"We are very bullish in that subset of the health care field." Sadoff said. "It is a very hot area. A lot of companies want to get into some aspect of new technology. And it goes back to the aging populations where people are living longer and there is more need than in the past."
Riding the backside of the housing market peak should not be looked at as a bad thing, but as a shift in trends, Jenson said. Every hot stock or investment option will hit its peak, and the trend will retract or cycle back, he said.
Baird is closely watching the housing market, Bittles said.
"It depends on how the housing market unfolds. If it is a mild setback, then that will be OK, but if it is harsh the economy will slow," Bittles said.
And if there is a harsh backlash from the housing market, Sadoff said, investors should keep a cautious eye on companies and financial institutions that offer mortgages. If unemployment increases due to a recession, for instance, consumers would not be able to pay their mortgages, and they may be more likely to go into foreclosure, Sadoff said.
"Hopefully we can muddle through this, and the Federal Reserve can get us through the maze and get out OK," Sadoff said.
Amy Croen, co-founder of Milwaukee-based Geneva Capital Investment Ltd., said she expects moderate corporate earnings growth, but it won’t generally be as robust as it has in the last couple of years.
"Investors mostly focus on what is happening in terms of corporate profits, inflation and interest rates, and I think those are benign," Croen said. "We are in a positive recession, and therefore profits will also be positive."
Sadoff has clients who would normally be 100 percent vested in the stock market, but he is suggesting they put 20 percent of their funds into cash accounts.
The best advice for investors remains the tried and true approach: diversify for the long haul, Jenson said.
"Investing is really just like anything else in life. It should be done in moderation," Jenson said.
