The people on Wall Street who make their money advising clients where the stock market is heading have been fooled again.
For the fourth consecutive year, the major stock market indexes produced double-digit returns after many experts predicted more modest returns. The robust showing came despite economic calamities in Asia and Russia, and despite the White House sex scandal.
The market "fooled everybody on the upside," said Rob Brown, senior market strategist at the brokerage firm Ferris, Baker Watts Inc. in Baltimore. "Not too many people predicted a fourth year of 20 percent gains in the S&P 500. It has been a fabulous year from that point, and a fabulous year in which the market gave us a second chance."
Alan Ackerman, market strategist in New York at the brokerage Fahnestock & Co., said: "John Glenn went back into space, and the stock market looked as if it was headed for the stars."
The Dow Jones industrial average of 30 blue-chip stocks fell 93.21 points yesterday to 9,181.43 but ended the year up 16.10 percent after gaining 22 percent in 1997, 26 percent in 1996 and 33.5 percent in 1995.
The Standard & Poor's 500 index, a broader measure of the market, closed yesterday at 1,229.23 points, down 2.70 points, but was up 26.67 percent for the year after increases of 31 percent in 1997, 20.26 percent in 1996 and 34.15 percent in 1995.
The Nasdaq composite index -- dominated by big technology companies such as Microsoft Corp., Intel Corp. and Cisco Systems Inc. -- rose 25.74 points yesterday to close at 2,192.69, up 39.63 percent for the year after gains of 21.5 percent in 1997, 22.3 percent in 1996 and 41.5 percent in 1995.
Last year's strong performance is misleading, the experts said, because it was fueled by relatively few big companies, namely Internet stocks, technology companies and the blue chips.
"If you were in about 10 big-cap stocks, it was a great year," said Gil Knight, principal at Baltimore-based Allied Investment Advisors Inc., which manages about $12 billion in assets. "The rest of the market really hasn't done much of anything."
For example, the Russell 2,000 index, a broad-based measure of small-company stocks, was down 3.45 percent for the year, while the Nasdaq 100 stock index, which tracks the largest companies on the Nasdaq market, was up 85.31 percent for the year.
`Not a good sign'
"That is usually not a good sign for the market going ahead," said Richard Cripps, chief market strategist at Baltimore-based Legg Mason Inc. "You are not getting broad participation from all of the sectors."
Cripps said investors' focus on the large-company stocks has pumped up market capitalization to stunning levels.
Microsoft, for example, is valued by Wall Street at $345.8 billion, more than the combined market value of the 600 companies that make up the Standard & Poor's Smallcap 600 Index.
"We need some kind of market drop to change people's perceptions," he said.
Whether or not that happens, the market has demonstrated that it can climb back after a battering.
In August, September and October, the market was pummeled when Russia defaulted on its debt and its currency, the ruble, crumbled.
Investors were already unnerved at the time by news that Japan, with the world's second-biggest economy, had slipped into recession, and fears persisted that the currency crises throughout Asia were spreading to Brazil, where investors reacted by pulling billions of dollars out of the country.
On the domestic front, there was unease as sensitive material from the White House sex scandal was released to the public in September and a large, New York-based hedge fund nearly collapsed, prompting the Federal Reserve to broker a rescue package.
The Dow, which climbed to 9,337.97 on July 17, fell 19.3 percent to 7,539.09 on Aug. 31, while the Nasdaq composite index plunged 29.5 percent to 1,419.12 on Oct. 8.
Since then, the stock market has charged back. The Nasdaq composite is up 54.5 percent since its October low, and the Dow is up 20 percent since its low the same month.
3 cuts in interest rates
Experts say that the Fed came to the rescue by cutting interest rates three times from Sept. 29 to Nov. 17 and that foreigners invested heavily in U.S. blue-chip stocks because they found few better investment opportunities overseas.
Some are worried that the market could be overvalued. Internet stocks, such as Amazon.com and America Online Inc., have been bid up to unbelievable prices.
Amazon's stock price was up nearly 1,000 percent last year, closing at $321.25 yesterday.
"If this area comes unglued it will just expose the rest of the market," Cripps said.
The experts are conservative again in looking ahead to this year. Few expect the market to continue its impressive pace.
The elements that helped drive stocks higher -- low inflation, low interest rates, low unemployment and strong consumer spending -- haven't changed, but the experts are looking for more modest returns this year, perhaps 8 percent to 10 percent.
"Our biggest danger is expectations that are too great and the inability to accept some type of return to reality," Ackerman said. "Nothing goes straight up."
Pub Date: 1/01/99