Market forecast upbeat at Legg

'04 prospects `quite good,' fund manager Miller says

December 11, 2003|By Paul Adams | Paul Adams,SUN STAFF

NEW YORK - After three years of market pessimism, the top stock pickers at Baltimore-based investment firm Legg Mason Inc. predict 2004 will be a year of rising stocks, falling unemployment and relatively low interest rates.

Star fund manager William H. Miller III, who heads the flagship Legg Mason Value Trust, said he is more bullish about the coming year than many investors who still see warning signs among the positive economic news piling up on Wall Street. Miller, whose fund - up 33 percent so far this year - is on track to beat the S&P 500 index for a 13th consecutive year, and other top Legg managers spoke yesterday at the firm's annual asset management symposium in Midtown Manhattan.

"The outlook for the next 12 months is pretty good - in fact, quite good," he said.

Miller said his outlook for the economy's performance was better than many estimates, with the average estimate for growth in 2004 about 4.5 percent. The economy grew at an annual pace of 8.2 percent in the third quarter, the fastest rate of growth since 1984.

Miller made a checklist of all the reasons for optimism. He pointed to rising worker productivity, which has increased an average of 5.6 percent over the past eight quarters; improved consumer confidence; solid corporate profits; a falling poverty rate; and various other factors signaling that the U.S. economy is poised for a sustained recovery. Nearly every Federal Reserve district is reporting positive economic growth, he said.

"There's a lot of focus on the negative and not on what could go right," said Miller, who manages $29 billion in assets.

Miller didn't give any specific projections for market performance other than to say he expected an up year. But investors have history on their side. Unless stocks rise more than 28 percent in 2004, he said, the market's five-year trailing average will be in negative territory at year's end. Historically, such downturns have been followed by several years of positive returns in the neighborhood of 15 percent, Miller said.

Miller and other Legg managers say the improved economy will ultimately translate into more jobs, which have so far failed to materialize in large numbers.

S. Kenneth Leech, chief investment officer for Legg subsidiary Western Asset Management, predicted more modest growth in 2004. He called for economic expansion of 3 percent to 4 percent and a low rate of inflation at 1 percent to 2 percent. Leech noted that housing and automobile sales, which have boosted the economy as interest rates have fallen, won't have the same influence in the year ahead.

Small-cap and micro-cap stocks, defined as companies with less than $400 million in capital, will continue to outperform the rest of the market next year, but not at the same level as in the past year, said Charles M. Royce, president of Royce & Associates, another Legg subsidiary.

"A low-return environment significantly favors small caps, and I think that will continue," he said.

Royce said the dollar's recent slide against the euro and other foreign currencies will eventually be felt in the market.

However, Legg managers don't expect the Federal Reserve to raise interest rates until late next year, opting instead to let inflation rise further before putting on the brakes. "We think the Fed is going to try to resist raising rates," Leech said.

On Tuesday, Federal Reserve policy-makers voted to leave the federal funds rate, the benchmark U.S. interest rate, at a 45-year low of 1 percent and signaled that it would maintain that policy for a "considerable period." Miller said the days when the Fed moves to slow a sizzling economy by pre-emptively raising interest rates are over. He said the Fed will be "extremely patient" with respect to raising rates.

Noting its continuing cooperation with regulators, Legg officials declined to talk about developments in the broadening mutual fund industry investigation being conducted by New York Attorney General Eliot Spitzer and federal regulators.

In a question-and-answer session, Royce said he expects the investigation to have a larger impact on intermediaries, which process trades for large clients. The probe is likely to lead to only minor regulatory changes in mutual fund disclosure rules, he said.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.