William E. Dodge isn't shellshocked by the stock market's plunge and the economic turmoil from the Sept. 11 terrorist attacks.
In fact, Dodge, the president and chief investment officer of the Delaware Investments mutual fund company, is predicting a big rebound by the stock market.
"I'm bullish, particularly over the next 12 to 18 months," Dodge said Wednesday during a presentation to investors in Cheektowaga. "I think we've seen the bottom."
And now, Dodge is looking for a major recovery as the Federal Reserve's interest rate cuts, and increased government spending kick in to stimulate the slumping economy. "There is a tidal wave of liquidity washing over us," he said during his talk, which was sponsored by Georgetown Capital Corp. in Williamsville.
That, in turn, should help turn the tide for corporate earnings, which are slumping badly now but should start improving next year and accelerate as the year goes on. Dodge thinks corporate profits could surge by 25 percent between June 2002 and June 2003.
That could propel the stock market sharply higher as skittish investors, now sitting on about $2 trillion in cash, anticipate the improved economy and the brightening prospects for profits. Dodge thinks the Dow Jones industrial average could soar by 34 percent to 12,400, while the technology-laden Nasdaq composite could rocket 67 percent higher to 2,750 by April 2003.
"The valuations are pretty favorable coming into this environment," Dodge said. "In the short run, the stock market is going to do well because earnings are going to do better."
Dodge thinks the U.S. economy, spurred by a string of Fed rate cuts earlier this year that were just beginning to have an impact, was on the verge of a rebound before the Sept. 11 terrorist hijackings. Those attacks probably have delayed that recovery by about three months, he said.
"When the Fed wants to do something, it wins. The Fed won't stop cutting interest rates until the economy turns around," he said.
But that turnaround will take some time. Dodge expects corporate profits to be down 12 percent to 14 percent this year, and he is even less optimistic than most analysts about next year. He predicts a 4 percent to 6 percent improvement in earnings during 2002, far less than the 17.5 percent gain expected by analysts surveyed by Thomson Financial/First Call.
Still, Dodge warned investors not to expect a return to the same growth-oriented stock market that produced such outsized gains during the late 1990s.
With the average Baby Boomer now approaching 53 and undoubtedly chastened by the stock market's plunge since March 2000, Dodge thinks those investors are going to start thinking more about their approaching retirement, which could be only a decade or so away.
So rather than focus on growth at all costs, as many investors did during the late 1990s, he thinks they will take a more diversified approach to investing, mixing value and growth stocks with a growing portion of bonds and fixed-income investments to buffer the stock market's volatility and produce a stream of income.
"There is a structural change going on in how people are investing," said Dodge, who thinks bonds will be "incredibly attractive" to Baby Boomers in the coming years. "We haven't even begun to see the money go from cash to fixed-income" investments.
"This is a generation that has been working hard and benefiting from a stock market advance," he said. "But the idea of growing the income stream to meet the needs of retirement is going to take on added importance."