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FORECASTERS GO ONCE MORE INTO THE BREACH...The pros see modest stock gains-again. Slowing profts may finally vindicate them
Like last year, analysts see plenty of reasons to be less than exuberant. One of the main supports for stocks, corporate profits, is caught in a vise created by tight U.S. labor markets and global overcapacity. Squeezed by rising wages and falling prices, earnings will rise a lackluster 3.5% in 1999, the consensus says. At the market's current lofty level, even bull Peter J. Canelo of Morgan Stanley Dean Witter calls it slightly overvalued. But with energy prices at a 12-year low, Canelo thinks inflation can fall below 1%. That would make stocks cheap at today's prices, he says. PINK SLIPS. Others say stocks will be rescued by the American worker, at whose expense companies have carried out past campaigns to cut costs and boost profits. ''We will see layoffs that could make 1999 the single biggest year'' for pink slips in the '90s, says BankBoston's Ned Riley. Riley sees the 4.4% jobless rate exceeding 5% by next fall. Such cost-cutting could help corporate profits and stocks, but only if the engine of global growth, the American consumer, doesn't get too spooked. The outlook for interest rates, the other key determinant of stock prices, is brighter. With inflation tame and the Federal Reserve more likely to relax than tighten monetary policy, rates will stay low enough to ''offer some underpinning to the market,'' says Jerry Dombcik of McDonald Investments. By yearend, analysts see little change in the current 30-year Treasury yield of 5%. Of course, a shock could derail everything. Although most analysts expect volatility to ease as Asian economies mend, some think worse than expected Y2K compliance could cause another bear market scare. And with stocks expensive by most standards, any bad news increases ''the likelihood of a sell-off,'' says Barry Hyman of Ehrenkrantz King Nussbaum Inc. Indeed, pessimists look for stocks to drop by as much as 35%. But for now, most pros have faith in the Fed's ability to calm global jitters: ''We may have the second soft landing in five years,'' marvels Hugh Johnson of First Albany. Market gurus also have faith in another powerful player--the individual investor, whose retirement needs are driving money into stocks and turning bad news into buying opportunities. Rao Chalasani of EVEREN Securities Inc. expects the flow of money into U.S. stocks to reach new highs, as falling interest rates and import prices give American consumers the equivalent of a tax cut and relaxed Japanese regulations allow investors to buy foreign mutual funds. The strong appetite for stocks is behind Deutsche Bank strategist Laszlo Birinyi Jr.'s forecast of a 36% rise in the Dow next year, making him the survey's biggest bull for the second straight year. NET HIGHFLIERS. The investment guru perhaps most associated with the bull market, Goldman, Sachs & Co.'s Abby Joseph Cohen, expects the Dow to rise 11.6% to 9850 as foreign economies stabilize and corporate profits rise 7%. ''The key to our bullish view on stocks has long been our bullish view on the U.S. economy,'' says Cohen, who sees no end to ''the best economic and corporate performance in a generation.'' Riley of BankBoston expects the Dow to finish 1999 at 10,025. Nonetheless, he is concerned about valuations. ''There is a bubble of sorts--no question about it,'' he says. The evidence: the rich price-earnings ratios of top performers, including Dell, Microsoft, and Cisco Systems. More worrisome, though, are the prices paid for profitless Internet stocks--a sector many think will crash in 1999. Such concerns didn't stop analysts from anointing technology their favorite sector for 1999, however. As with second-choice health care, the rationale is that steady demand will boost earnings even as overall profit growth slows. Last year's top pick, financials, still has a following, thanks to continuing consolidation and a benign interest rate outlook. Contrarians are betting on battered energy stocks. ''I don't see much downside risk,'' says Rob Brown of Ferris, Baker Watts Inc. He says Amerada Hess trades at a 34% discount to the $75 per share value of its reserves. How well did strategists do last year? As of Dec. 15, the cutoff date for picking the winner, Allan Roness of JW Genesis was the big star, pegging the S&P within 3 percentage points and the Dow and NASDAQ almost on the button. Robert Dickey of Dain Bosworth Inc. trailed the pack, falling 31% short of the Dow's finish. Dickey won the BW forecasting ring in 1996. For next year, Roness remains bullish and Dickey bearish (see list, page 99). As for picking individual stocks, Birinyi and Chalasani came out on top with America Online, up 309% through mid-December. Other winners include Lehman Brothers' Jeffrey M. Applegate, who chose Microsoft, up 104%; and Riley, who picked Ascend Communications, up 133%. The worst: Brown, whose Patina Oil & Gas fell 68%; and CIBC Oppenheimer's former strategist E. Michael Metz, whose choice, Polaroid, fell 59%. If the pros get it right, their triumph will probably reflect astute calls on interest rates and profits. But in all likelihood, their cautious outlook will prevail only if the individual investor agrees that the time has come to restrain the exuberant bull.
By Anne Tergesen in New York RELATED ITEMS
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Once again, the bull outran Wall Street's expectations. For the second straight year, the major stock indexes closed far above the consensus forecast of 45 market strategists BUSINESS WEEK surveyed last December. Even the Dow Jones industrial average--which at 8823.3 on Dec. 15 was up less than half as much as the technology-heavy NASDAQ--managed to rise 4.5 percentage points more than the pros believed it would. But far from being emboldened by their history of excessive restraint, on average Wall Street's investment gurus are forecasting modest gains for 1999, with the Dow expected to reach 9567 (up 8.4%), the Standard & Poor's 500-stock index 1230 (up 5.8%), the NASDAQ 2081 (up 3.4%), and the Russell 2000 index 432 (up 10.9%).
Updated Dec. 17, 1998 by bwwebmaster
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