Riding Global Growth

Long-term interest rates were supposed to be going up by now, and after a blistering run, stocks may have got ahead of the recovery. Meanwhile, job growth has been lackluster, and suddenly terrorism concerns are back in the markets. In short, things are as confused as ever. To sort it out, TIME asked a panel of portfolio managers, moderated by senior writer DANIEL KADLEC, to assess the state of our investments. Our panelists are stalwart long-term bulls on the global economy and believe job growth will return this year. There is wisdom in dividends, they say. And the best buys in flat-screen TVs are the stocks of companies that make them. For more on that, and other pearls, read on.

TIME: Why don't we start with an overview. Where are we in the economic cycle?

RON MUHLENKAMP: We said in July '01 we thought it was going to be a normal cyclical recession, that we weren't headed for depression or inflation. We continue to believe that. Now we are at a transition point. The economy is stronger, and the markets have recovered the kinds of things you normally recover as you come out of recession, like technology and some speculative companies. So we think we are back to normal, but it is a normal we haven't seen since the 1960s. We think inflation stays at 1% to 2% and long-term interest rates stay under 5%. Short-term rates are lower than they should be. I'd be voting to raise them now. The only thing not back is jobs, which always lag.

TIME: But the lag is of record length and creating a political issue. What makes you sure we'll get a real jobs recovery?

MUHLENKAMP: I am an investor but also an employer. If I'm making money, there are two good reasons I hire: to make more money and to save time. Companies have been cautious, but the patterns are familiar. Jobs will be back.

ELIZABETH BRAMWELL: We have had 10 months of rising temporary employment, which is a good leader. And it's wrong to look at today's numbers without putting the year 2000 into context. That was the bubble. We hired anyone.

TIME: So we should never have had all those jobs to begin with?

BRAMWELL: Exactly. It's like looking at your stocks and comparing prices to when they were at their peak. That's unrealistic when the peak didn't last long.

ROBERT LYON: I don't think employment is as dire as the headlines. You couldn't have the strong retail sales we have if that were the case. People aren't getting counted because they are self-employed. You will see better employment growth the rest of the year.

TIME: From an investing view, is it important that jobs recover in the U.S.?

SUSAN BYRNE: Companies don't care if our children are working in a Nissan plant in North Carolina or if we hire an accountant in India. The kinds of jobs we create here and the kind we send overseas may have a profound effect on society, but it doesn't affect corporate profits. In a worldwide sense, we are having a strong and vigorous jobs recovery.

TIME: So it's about global job growth because it's a global economy?

BYRNE: That's the way we invest.

BRAMWELL: As a middle class develops in China and India, demand for American services such as life insurance, credit cards and mortgages will create enormous numbers of jobs here.

TIME: Liz, what's on your radar?

BRAMWELL: The big surprise is that interest rates, which are low, could go lower. On a bell-shaped curve from 1950 to 2010, the midpoint is 1980. Rates went up the first half of this period and are coming down the second half, with incredible symmetry. At 2010 on this curve, long rates are at 2%. Money will flow where the most attractive returns are likely.

TIME: And 2% is hardly attractive.

BRAMWELL: We think playing the developing middle classes around the world is smart. My grand concept is that when the Berlin Wall came down, it opened markets that companies never thought they'd get into. Developing a middle class in Asia may have even greater significance. Also, with T-bills yielding less than 1%, companies with solid dividends are an attractive alternative for many savers.

TIME: We've been writing about dividend payers for a year. They make a lot of sense but have lagged the market badly.

LYON: A shift started in November.

BRAMWELL: Last year was the year rates came down. It was the year for the really stressed-out companies to recover. Dividend stocks will do better now. Take a company like Procter & Gamble, yielding 1.8%. It increases its dividend every year. This is a large, seasoned company. You might be better off, in a diversified portfolio, having that rather than a money-market fund.

TIME: Rob, what do you see?

LYON: The stimulus put in place the past 18 months is huge and will spill into 2005. Profits are recovering, and that will lead to more spending and more employment. Inventories are really low. Our view is that getting inventories back up to a normal level would add as much as 1 percentage point to GDP growth. We think it's important to disaggregate between tech stocks and everything else. If you hadn't been through a tech bubble, you'd think you were in one now.