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Stacey Wall, Pinnacle Trust Company

When Stacey Wall speaks, folks around Mississippi listen.

That's because Wall, president and CEO of Ridgeland-based Pinnacle Trust Company, is noted for his spot-on assessments of national and global economic conditions to forecast trends in the economy and bond and stock markets.

The financial services executive predicted in the mid-1990s the massive technological boom that exponentially increased business productivity in the United States. In 1999, he called Y2K "Y2-not" and correctly predicted that concerns regarding computer conversions were overblown.

In February 2000, Wall anticipated the end of the technology and Internet stock explosion. A month later, the NASDAQ — the index most associated with Internet and technology stocks — peaked and began a slide that ended 22 months later after a nearly 80 percent decline.

In 2003, Wall accurately predicted that a boom in stocks would follow a short war in Iraq. He pinpointed significant events in subsequent years.

Wall recently spoke exclusively to Mississippi Medical News about 2007 market predictions:

As we move into the New Year, the stock market continues to benefit from: 1) high and rising profit margins throughout corporate America, 2) increased merger and acquisition activity that continues to shrink the supply of stocks, and 3) an economic soft landing. But there are multiple factors that could cloud the three-year run we've experienced in the stock market: a renewed uptrend in oil prices, depreciation of the dollar, continued weakness in the housing market, and sharper than expected slowdown in earnings growth. Additionally, longer-term valuations show that the market at current levels is relatively expensive. Our historical analysis also indicates the probability that the year will include a stiff decline.

Currently, we are in the most extended rally on the upside in history in terms of not having at least a 9.6 percent correction since March 2003. Add to that the fact that the current 200-plus-day rally has also gone without even a 2 percent correction — the longest such rally since 1958! These two factors clearly suggest a market that is overdue for a correction. I think this explains a lot of the recent choppiness.

We expect the soft landing to continue with growth of about 3.0 percent for the economy in 2007, slightly higher than consensus estimates. We believe inflation will be moderate during the coming year helped by more stable energy prices.

Evidence indicates that dividends are still popular with companies and shareholders alike. Dividend paying stocks in the S&P 500 outperformed non-dividend payers in 2006, 14.7 percent versus 9.6 percent. Companies that grew their dividends outpaced those that cut or eliminated them by a wide margin of 14.7 percent to –1.1 percent.

Additionally, while the dividend payout ratio for the S&P 500 fell to its second-lowest level on record in the fourth quarter of last year, the decline was due to continued strong earnings growth rather than weak dividend growth. In fact, the 12.0 percent growth in S&P 500 dividends per share was above the 4.7 percent gain per annum since 1926, the 5.7 percent GPA over the past 20 years and even the 11.3 percent GPA since the cyclical bull market started at the beginning of the fourth quarter of 2002. The dividend yield of 1.8 percent remains well below the long-term mean of 3.8 percent, underscoring secular risks. But it is in line with the 2.0 percent mean over the past 20 years and 1.8 percent since the bull market started.

Our core belief, while not very original, is that stock prices are determined by supply and demand. It does surprise us how little time Wall Street analysts spend on the subject. Our research is designed around these principles:

· Since price is the equilibrium between supply and demand, rising prices (uptrends) argue that demand is stronger than supply, and vice versa when trends are down.

· The Fed can somewhat control the supply (and cost) of money. A strong-willed Fed can definitely impact supply and demand.

· Keep a close eye on sentiment. An extremely optimistic crowd would suggest most investors were fully invested indicating low potential demand and lots of potential supply.

In short, this is not an easy market to call with many mixed signals. But for now, we're still giving the bulls the benefit of the doubt.




March 2007

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