A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Weaker Growth Pressures Stocks

JAN HOPKINS: On Wall Street, a weaker reading on U.S. economic growth pressured stocks. Trading volume especially light ahead of this Memorial Day weekend. $135 billion in market value was erased today. For the week, the Dow was down 2.5 percent, the Nasdaq tumbled more than 4. The S&P 500 lost 2 percent. Now to our weekly Wall Street panel. Portfolio managers Sarat Sethi, economist Lakshman Achuthan and our own Christine Romans and Greg Clarkin. Greg, the Nasdaq lost half of what it gained last week this week.


HOPKINS: What are you hearing about the future?

CLARKIN: If you looked at today's trading, Jan, it kind of capsulized the fears out there in technology land. You had Sun Microsystems saying that orders are tracking slightly behind last quarter's pace, so spending obviously isn't picking up.

And then you have the chip stocks. Chip equipment stocks, specifically, Goldman Sachs downgrading the entire bunch, basically saying after the recent run, it's a good time to head for the sidelines. So the chip stocks, a very influential group under pressure all day, spending not picking up. And that's the two fears still plaguing technology stocks. Christine, you've been polling people at the New York Stock Exchange. What are they saying about the coming weeks?

CHRISTINE ROMANS, CNN FINANCIAL NEWS: They're saying this week was all tech. There were concerns about tech and terrorism hurting the market this week. Next week they're saying historically, the week after Memorial Day, the market does a little bit better. They think if nothing happens this weekend to really rile investors, nothing happens in New York City, everything goes smoothly for Memorial Day, you could see the buyers coming in maybe Wednesday next week. So I'm hearing people are hoping for some sort of Wednesday rally.

HOPKINS: Sarat, you manage people's money. In this kind of environment, where it's -- the Nasdaq's up 8 percent one week and down 4 percent the next week, what do you do with that money?

SARAT SETHI, DOUGLAS C. LANE & ASSOC.: Well, we have to look at the long-term trends. And what we're seeing right now are good opportunities for us to invest in different sectors. After last week's run, you knew you were going to give back some this week. And then with the uncertainty, as you mentioned, especially going into this weekend, nobody wanted to hold long positions. But as a long-term investor, you can see what were the opportunities. The last couple days give us some good times to get into the market.

HOPKINS: So you buy the stocks that have been beaten up, basically?

SETHI: We buy across the board. We actually buy 50 stocks that are diversified across a broad range of sectors. But the market gives you opportunities to buy stocks, such as Qualcomm at this point, when tech spending, everybody is getting all scared about it. Well, this is a good time for us to buy it for our clients, because nothing has fundamentally changed. And just because Sun said, you know, linearity is not going to be there, but they didn't say anything about earnings. They said those are going to be fine. And what we're finding on Wall Street, after what just happened with Merrill Lynch is that a lot of the analysts now are being overcautious. And they're trading. Goldman said 30 percent run-up, so let's sell. But if you're a long-term investor, you're not going to time the market. You're going to build your positions over time, and you're going to buy good stocks that give you the opportunity to buy them.

HOPKINS: Lakshman, the economy behind this, we also have one day it's good news, the next day the news is not as good. And that's part of the reason, also the backdrop of terrorism, threats, warnings. What about the economy and how does it kind of provide a platform under all of this?

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INST.: I think it's clear that we're in a recovery. And the data is bearing that out. But we get data like today, the GDP data, where it's revised down a little bit. It's very backward looking. It's the first quarter, but still that weighs...

HOPKINS: But still, 5.6 percent growth? That's...

ACHUTHAN: That's subpar, though. In the first quarter of recovery, in the post war period, is 7.3 percent. In the postwar period, the first quarter is 7.3 percent on average. So this is subpar. But it was a relatively -- again, in the post war period, mild recession. Now, looking forward, one of the key things economists are worried about is, is business spending going to come back? And we're seeing indications of that. Durable goods orders are up. Profits are actually up. You're seeing a rise. It's off of a low level. We're not back where we were a couple years ago, but the direction is correct. And that's key for a sustained recovery.

SETHI: You've seen numbers on productivity increase, too. We think that's going to actually help, because businesses will see that their return on investment is improving. Now, the question for you is, when do you think this is actually going to come back?

ACHUTHAN: I think it's going to come back sooner than people think. We're on a trend, a negative trend, a recessionary trend. It's hard to break and go the other way. I think it comes back within this year. You're going to see things change.

HOPKINS: And you buy a little bit in advance, right?

SETHI: Absolutely. You actually average in over time, so you don't buy your position today. You buy it and then you wait. And if the market gives you the opportunity, you buy more. If not, it's great, because the stock's actually gotten ahead of you.

HOPKINS: Thanks. Sarat Sethi, Lakshman Achuthan, and Christine Romans and Greg Clarkin.