Bull will run but the ride may be rough

Strength: A solid economy and a presidential election will keep the market going.

January 23, 2000|By Eileen Ambrose | Eileen Ambrose,Sun Staff

If you're hunting for bear, you're not likely to find it on Wall Street this year.

Many market experts predict 2000 will continue the long-running bull market, although the gains won't be as hefty as in years past. And the ride upward may be a lot bumpier.

In its favor, the market this year has a strong domestic economy and a strengthening of economies overseas that should boost earnings of U.S. companies, experts said. Consumer confidence is robust.

Also, this is a presidential election year, and traditionally the White House and the Federal Reserve are reluctant to do anything to upset the economy or market during a year when voters are deciding who sits in the Oval Office, experts said.

The bullish prediction, however, "comes with a caveat," said Patrick Buttarazzi, a financial adviser with Prudential Securities Inc. in Baltimore. "This year's ride will not be as smooth as the previous year."

Inflation concerns are surfacing. The Federal Reserve, after increasing interest rates three times last year, is expected to raise them again next month. And that may not be the end of rate increases this year.

"At some point, higher rates are incompatible with higher stock prices," said Richard Cripps, market strategist for Legg Mason in Baltimore.

"Where that point is, we don't know."

Rising rates or other factors could cause "some scary corrections" of 5 to 10 percent, Buttarazzi said. "We had them last year and will have them this year, maybe more frequently.

"These are just pauses. They don't terminate a bull market," he added.

Last year, the major market indexes ended the year at record highs.

It was the fifth year in a row that these indexes produced healthy double-digit gains.

Market watchers predict that the Dow Jones industrial average of 30 blue-chip stocks will rise from 8 to 12 percent this year. Standard & Poor's 500 index, a broader measure of market performance, may gain 10 percent.

That's on top of gains last year of 25.22 percent for the Dow, which wound up at 11,497.12, and 19.53 percent for the S&P 500 index, which closed at 1,469.25.

There's less consensus among market pros about this year's Nasdaq composite index, which is heavily weighted with technology companies. Technology, telecommunications and Internet-related stocks drove the market last year.

In 1999, the Nasdaq surprised many by rocketing to 4,069.31, for an 85.59 percent gain. You'd have to go back to 1915 to find a major U.S. market index up that much in a year, said Alan Skrainka, chief market strategist for Edward Jones in St. Louis.

Those more bullish on the Nasdaq anticipate gains ranging from 15 to 25 percent.

Cripps, though, predicts the Nasdaq will be flat or slightly down this year. Investors have become enamored with Internet stocks and have sent their prices skyward without regard to fundamentals, such as earnings, he said.

He calls this the "Internet fairy dust" phenomenon. "If you sprinkle it on the stock and spin a press release, you get investors reacting in an intense manner," Cripps said.

But investors' love affair with anything Internet or technology-related may not last. Indeed, many market specialists are predicting a broadening of the market, where investors rediscover overlooked sectors, such as health care or manufacturing.

Still, not everyone is bullish.

"Perhaps the greatest damage to the U.S. economy today does not come internationally from Asia, or even inflation, but from Wall Street. Valuations on Wall Street today are so far above historic norms that it creates an unusual degree of economic risk," said James Stack, president of InvesTech Research in Whitefish, Mont.

High valuations don't necessarily mean bear markets, he added.

"What it means is it wouldn't take much of a bump in Wall Street's road to trigger an economic downturn. And that in itself would become a snowball effect," Stack said. "Whether or not we see a bear market in 2000 will depend almost entirely on whether the Federal Reserve can successfully let the air out of Wall Street's exuberance gradually."

Bearish or bullish, market experts are concerned about unrealistic expectations by individual investors. Many investors today have never experienced a prolonged bear market. The last one with any claws occurred during the 1990 recession, experts said.

"If you are going to be successful in the market, be an optimist -- but a realistic optimist," said Edward Jones' Skrainka.

A survey by Opinion Research International, Skrainka said, found that investors 54 and younger expected the average annual return in the stock market to be 20 percent over the next decade. Those 55 and older expected an 11.5 percent average annual return.

"Our advice to anyone under 55: 'Listen to your mom and dad,' " Skrainka said.

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