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At a tumultuous time in the political history of the country, Don Gher, principal at Coldstream Capital
in Bellevue, was called upon to surmise the impact of last week’s election on the nation’s financial markets. As Don said, “I’ve changed my topic five times in the last 30 minutes based on the close presidential race.”
Educated at Eastern Illinois University, Don worked for the FBI before going into the investment business. In 1984, he linked up with
Bob McNulty in a venture in San Francisco. When Coldstream Capital was founded, the two were re-united.
Gher said that the end of the Cold War was the beginning of the “Knowledge Age,” when the high increase of productivity began impacting
the economic cycle. “As a country, our productivity has risen greatly, but we still have problems and not everything is rosy.”
Gher referred to the Goldilocks cycle, where the current economic situation was described as being “too cold, too hot, or just right.”
Now, there’s a new metaphor … the Old McDonald cycle … E-I, E-I, O.
E stands for Euro:
“Problems will accelerate in the European Union. They’ve only been at it for a few years, but their currency has dropped to all-time lows … off 25% to 30%.”
I indicates Inflation:
“This shouldn’t be a long-term problem. Controlling inflation is a short-term project. Keep your eyes on the various economic reports due out soon.”
E stands for Earnings: “The slowdown in earnings will likely continue.”
I is for Interest: “The Fed controls short-term rates. To avoid a recession, the Fed can step in and cut rates in 2001.”
O is for Oil:
“The impact of oil on our economy acts like a tax. The high prices are starting to sap our economic health. Some 16% of total spending is for oil … it needs to be in the 7-8% range for our economy to handle it properly.”
Gher told his audience to watch out for the Purchasing Manager’s Index. “It gives a good account of what to expect in the months ahead.
As far as the marketplace is concerned, there are corrections ahead. Some good news indicates that the profit momentum has slowed, but is not going down this year. Expect profits to be up about 12% this
year, falling slightly to average 8% next year.”
As far as the stock market is concerned, “People go to more staid, consistent growth-type stocks when things slow down. Entrepreneurs
still hold a major place in how the economy will act.”
Gher gave some statistics regarding the politics of the economy. “If the incumbent wins, you can expect the markets to improve to near
14%. If the challenger wins, you can expect a 2.5% drop. Still 2001 will look better. The baby boomers have aged and solidified their net worth. Now, attentions turn to the 16-34 labor force as a dynamic
in the economy.”
The nation’s savings rate usually increases when stocks fall. “Overall, there’s a favorable backdrop for a good economy, as we’re
downplaying expectations and basing our experience on reality. As a statistical note, the annual average stock market returns from 1926 to 1998 is pegged at 10.8%. Expect a rising, but slower rate of
growth. The slowdown is occurring now and will turn around in early 2001.”
Thanks to Bob McNulty for his introduction.
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