March 8, 2011
Ed Hyman is not worried about China, quantitative easing or fiscal deficits. Equity market performance this year will be strong, Hyman predicts, and the US economic recovery will proceed.
But the caveat in his outlook – and it is an immense one – is its dependence on the price of oil remaining sufficiently stable.
Hyman has been rated Institutional Investor's number one Wall Street economist for each of the past 30 years. He is the founder and chairman of NY-based ISI Insight, a global economic consulting firm.
Hyman was also the keynote speaker at the Boston Security Analyst Society’s annual dinner. That was last Tuesday, a day when the price of gasoline was up $.30 – a “nightmare,” according to Hyman.
“If they start to have that ‘Egypt thing’ in Saudi Arabia,” he said, “oil is really going to go up.”
The immediate impact of a rise in gas prices would be a slowdown in consumer spending. Hyman said that gas spiked in both 2005 and 2006 – by almost a dollar – and both times retail sales went negative for the next three months. The medium-term effect of those two episodes was “benign,” he said, and that could be the case this time.
Hyman’s forecast this year is for 5.5% GDP growth, $97/share EPS on the S&P and 2.0% inflation, with similar numbers in 2012, all of which he conditioned on crises in the Middle East not getting out-of-hand.
Putting oil aside…
Four drivers underlie Hyman’s forecast for the economy and the market.
Number one on his list is Fed Chairman Bernanke, whose “whole game plan is to get the stock market up,” Hyman said. Bernanke also intends to do what he can to lower unemployment, he added.
Indeed, Hyman said, the “only game in town is the stock market,” and the Fed’s goal is to build wealth and consumer confidence by boosting equity performance.
Bernanke’s equity-market orientation comes from his association with a group of key thought leaders. Ken Rogoff, co-author of the popular book This Time is Different, got his PhD at MIT a year after Bernanke, and the two are best friends. Rogoff also introduced former economic advisor Larry Summers to his second wife. All three are close to President Obama and share the same goal – avoiding a prolonged recession, which, as Rogoff has documented, typically follows a financial crisis.
“I guarantee Bernanke is watching the stock market like a hawk,” he said, “and he is probably more upset about the S&P being down 20 points than he is about gasoline being up $.30. But the combination is pretty bad. “
If the equity market stumbles, Hyman said the Fed will do another round of quantitative easing.
He knows this from experience. Last spring the Fed temporarily halted its quantitative easing and its balance sheet stopped expanding. That was premature, Hyman said, and “the market rolled over. The economy weakened and the double-dip risk came up.”
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