Wien Predicts Recession, Stock `Correction' in U.S. (Update4)

By Michael Patterson


Jan. 2 (Bloomberg) -- Byron Wien, the strategist whose New Year's predictions have influenced investors for a quarter century, said the U.S. economy will fall into a recession and stocks will tumble 10 percent this year.

The Standard & Poor's 500 Index will rally in 2008's second half after a decline that meets the common definition of a market ``correction,'' Wien, chief investment strategist of Westport, Connecticut-based hedge fund Pequot Capital Management Inc., wrote in his 23rd annual list of 10 ``surprises.'' Democrat Barack Obama will beat Republican Mitt Romney in a ``landslide'' to win the U.S. presidency, he added.

Wien, whose stock market forecasts proved wrong the past two years, expects the Federal Reserve to cut its benchmark interest rate to less than 3 percent from today's 4.25 percent as the unemployment rate climbs above 5 percent for the first time since 2005. The 74-year-old strategist says his predictions have at least a 50 percent chance of coming true, while the consensus view is one-third odds.

``It's going to be a tough year to make money,'' Wien, who helps oversee about $7.6 billion at Pequot, said in an interview with Bloomberg Television today. ``People underestimate the significance of what's going on in the housing business and the credit market.''

First Since 2000

The S&P 500 gained 3.5 percent last year after posting the first fourth-quarter decline since 2000. The measure ended the year at 1,468.36, after climbing to a record 1,565.15 in October. A year ago, Wien said the benchmark for American equities would surpass 1,600 in 2007. His 2006 forecast that the S&P 500 would lose 5 percent also proved inaccurate after the index gained 14 percent. He was on target for 2005, predicting that the S&P 500 would be little changed. It went on to rise 3 percent, the smallest move since 1994.

U.S. stocks tumbled today, led by banks and computer companies, after the biggest decline in manufacturing in five years sent the Dow Jones Industrial Average to its worst start to a year since 1983. The Dow average lost 1.7 percent, while the S&P 500 dropped 1.4 percent.

Central bankers lowered their economic growth outlook for 2008 and agreed to be ``exceptionally alert'' as they decided to reduce interest rates by a quarter-point, according to records released today of the policy-setting Federal Open Market Committee's Dec. 11 session.

Half-Point Cut

Traders increased bets the Fed will lower the target rate for overnight loans between banks by a half-point to 3.75 percent this month. The likelihood rose to 24 percent, from zero a week ago, based on contracts quoted on the Chicago Board of Trade. Futures show a 76 percent chance of a quarter-point move.

Central bankers will reduce borrowing costs ``to try to get the economy going again,'' Wien said. ``It's not clear to me that they're going to be successful.''

The S&P 500 lost 10 percent during a seven-week period ended Nov. 26. The index has corrected from a recent high 45 times since 1945, according to Harrison, New York-based Bespoke Investment Group LLC. After crossing that threshold, it has slumped another 7.8 percent on average. The S&P 500 has declined more than 20 percent, usually defined as a bear market, 11 times since 1945, according to Bespoke.

Wien, a former senior market strategist at Morgan Stanley, also predicted today that the 10-year Treasury note's yield will rise to 5 percent, gold will surge to $1,000 an ounce and oil will drop to $80 a barrel before rebounding to $115 by year-end.

$100 Oil

The yield on the 10-year note retreated 0.12 percentage point to 3.90 percent today. Gold futures gained 2.8 percent to $857.20 an ounce, and oil reached $100 a barrel for the first time.

Wien expects prices for agricultural commodities to climb, with corn gaining to $6 a bushel and cotton advancing to 85 cents a pound. Corn futures added 1.5 percent to $4.625 a bushel today, while cotton rose 1.3 percent to 68.88 cents a pound.

Chinese stocks may decline ``sharply'' as the world's fastest growing major economy slows and investors pay lower prices relative to companies' earnings, Wien wrote. China's CSI 300 Index, which tracks yuan-denominated A shares listed on the country's two exchanges, rose 0.9 percent to 5,385.10 today. The index surged 162 percent last year.

Obama will win the presidential election because of his popularity among young Americans, according to Wien.

Democrats ``are going to have to get the younger voters in this country to come out and vote,'' he said. Obama is ``the only candidate that can do that.''

Wien gave $1,000 to Obama's campaign in March, according to a filing with the Federal Election Commission. He also gave $1,000 to Rudy Giuliani, a Republican candidate for president, that month.