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SHIFTING TO A LOWER GEARInvestors may not be able to count on a sharply rising stock market
The range of estimates for corporate profitability in 1999 is wide. Economists polled by BUSINESS WEEK figure that profits will tend to be flat (page 82) because of slowing sales, weak pricing power, and rising labor costs. But earnings per share for the Standard & Poor's 500-stock index, when calculated by aggregating individual company estimates put out by stock analysts, may rise 17% (page 94), with estimates for technology companies coming in at 30% over 1998 results. These estimates typically start the year high and get pared back. U.S. strategists looking at the overall market are figuring on profit growth of 3.5% or so in 1999. Finally, there are reasons to believe profits could grow by a more respectable 7% to 9%. That's because 1999 comparisons should look good coming after the negative effects on 1998 earnings of huge write-offs in tHe financial sector and the beating that energy companies took from falling oil prices. Profits matter, but these days it's not clear just how much. In 1998, thanks to some well-timed easing by the Federal Reserve Board, stock prices seemed to transcend weakening profits. In fact, when the final tally is in, profits could turn out to have been off by 1% in 1998. For the market to have reached new heights at a time when profits were weakening is nothing short of remarkable. A slight rebound in profits in 1999 could buoy stocks. But if profits disappoint, there's no guarantee that interest rates will decline and soften the blow. So investors shouldn't count on being carried aloft by a sharply rising market. Instead, they'll have to be highly selective to make money. First, they should survey the landscape--check out what economists are forecasting, what the pros are doing, who's shorting what, and the latest from BUSINESS WEEK's fearless forecasters. Then, investors should pick their spots. Admittedly, this isn't easy. Just ask the mutual-fund managers who failed once again to beat the overall market averages (page 154). But if they're game, investors can try out some specially tailored approaches--hunting for undiscovered gems (page 120), for instance, or scanning the market for safe-haven stocks (page 114). GO EAST? Overseas, some analysts are saying, it might be time to reenter the Japanese stock market, on the assumption that policymakers are finally serious about turning the economy around (page 132). Emerging markets, meanwhile, are still strewn with potholes and will likely appeal only to the most intrepid (page 130). With the launch of the euro on Jan. 1, investors increasingly will need to do pan-European sector analysis, rather than country analysis, and new or overlooked investment opportunities may become apparent. Still, profits are slowing in Europe, and that will put a damper on prices (page 124). Some special circumstances, the experts believe, will continue to pump up stock prices. Several huge mergers were announced in the last few months of 1998, and the trend should continue (page 151). Technology stocks had a big runup again in 1998, and despite the widely perceived frothiness of this sector, many experts believe there's still room to run for those stocks (page 110). Financial-service stocks could still get hit by some bad news, as they were in 1998, but even in this sector there are opportunities (page 108). With the right care and attention, investors ought to be able to fashion a winning portfolio for 1999.
By Karen Pennar in New York RELATED ITEMS
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Anxious? That's understandable. After all, 1998 was a tumultuous year, marked by huge swings in mood--and prices--on global markets. Economies from Russia to Brazil were at the brink of collapse while world leaders from Helmut Kohl to Bill Clinton lost their jobs or saw their power curtailed. True, the U.S. economy hummed along smartly in 1998. But the guessing is that things will cool down in 1999. Increasingly, the experts believe that corporate profits will continue to be under pressure and that, in turn, incomes and growth will weaken. The experts aren't always right, of course--after all, most economists and investment pros have been badly underestimating the strength of the economy and the resilience of the stock market.
Updated Dec. 17, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.
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