| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
Will the Bull Outrun Predictions Again? The experts see an average 8.3% growth When celebrating the New Millennium, Wall Street's stock market gurus might consider making a bold New Year's resolution: Stop underestimating the bull market's strength and resilience. For the fourth straight year, the bull charged past the modest expectations of the strategists BUSINESS WEEK polled as the previous year drew to a close. In fact, before 1999 had even begun, the technology-heavy Nasdaq Composite Index had already rocketed past the consensus forecast of a 3.4% rise by yearend, and by Dec. 10 it had surged 64%. Although the Dow Jones industrial average looked like a laggard in comparison, it was about 1,600 points--or 17%--above the average forecast of 50 strategists surveyed last December. So are the forecasters finally catching bull market fever? Hardly. Still conservative, the 51 analysts we polled this year expect limited gains in 2000. The average prediction: an 8.3% gain, to 12,154, for the Dow; a 10% rise, to 1559, for the Standard & Poor's 500-stock index; a 5.1% increase, to 3805, for the Nasdaq; and an 8.4% jump, to 506, for the Russell 2000 index of small stocks. Why were the prognosticators so far off the mark in 1999? Fearful that tight U.S. labor markets and global overcapacity would squeeze corporate profits, they were blindsided when the profits of the S&P 500 rose an estimated 14.5%, thanks largely to a robust economy, according to earnings forecasting service I/B/E/S Inc. But as was true in 1998, the indexes' strength masked weakness in a large number of stocks. Approximately 69% of the stocks in the S&P 500 trailed the index, with more than half of the 500 down for the year, says Allan S. Roness, director of research at JW Genesis Securities Inc. and last year's top forecaster. As a result, the fuel that propelled the indexes higher was supplied by a narrow band of mostly tech and Net stocks. In 2000, many Wall Street gurus expect the market to embrace several wallflowers at 1999's party. The pros think the tide won't turn against the Internet and high-tech darlings that investors are chasing in an effort to own pillars of a new, tech-driven economy. But many are betting that the midcap growth stocks that perked up in 1999 will continue to rise, while laggards, including financial and cyclical industrial stocks, will rally. With the world economy recovering, ''people will recognize the potential for earnings growth in a lot of firms, and the market will broaden,'' says Subodh Kumar, chief investment strategist at CIBC World Markets in Toronto. BIGGER MO. Still, the gurus' hearts belong to technology, which for the second straight year was voted the sector with the best prospects. Like their Internet counterparts, tech stocks are given credit for a dynamic new economic era. They are also benefiting from the popularity of momentum investing, whose practitioners pile into rising stocks in the hope of riding them even higher. Although generally bullish on the Net, many experts caution that cyber-retailers that can't deliver dominant market share or profits will suffer stock price declines. ''It's tougher and tougher for startups to differentiate themselves from established firms,'' says Jay Ferrara, vice-president at Ziegler Asset Management. That's not the pros' only concern. Although analysts foresee the 30-year U.S. Treasury bond ending 2000 at 6%, close to today's level, ''what would scare the market is a radical increase in inflation expectations,'' says David Henwood, chief investment officer at Raymond James & Associates in St. Petersburg, Fla. An overheated economy could force the Fed to ratchet up interest rates. With only one exception, ''the Fed has been the catalyst for every market correction since 1962,'' cautions Jack H. Shaughnessy, Boston-based chief investment strategist for Advest Inc. Although Shaughnessy and Henwood are optimistic, the few strategists who expect the Dow to finish 2000 much below today's level are looking for declines of up to 21%. ELECTION BOOST. Whether the bull succumbs or not, sharply higher interest rates would make it impossible for companies to deliver the above-average earnings gains of 11% the consensus of stock pros foresees for next year. In 2000, earnings are expected to become more important than usual. That's because with stock valuations rich and interest rates more likely to head up than down, most analysts believe stocks can only climb if earnings propel them higher. Indeed, the market's most prominent bull, Goldman, Sachs & Co.'s Abby Cohen, calls the S&P 500 fairly valued now. Still, most pros have faith in the Fed's ability to stop inflation before it gains momentum. They also note that economic growth overseas is picking up, while American companies continue to profit from cost-cutting measures and productivity-enhancing technologies, including the Internet. According to this year's--and last year's--biggest bull, Deutsche Bank Securities Inc. strategist Laszlo Birinyi Jr., Presidential election years have been kind to stocks, which have declined only 3 out of 14 times since World War II. Who can lay claim to the most accurate forecast for 1999? When BUSINESS WEEK stopped the clock on Dec. 10, Philip J. Orlando of Value Line Asset Management and Thomas M. Galvin of Donaldson, Lufkin & Jenrette were the big winners. Robert F. Dickey of Dain Rauscher Inc. brought up the rear for the second straight year, falling 38.6% short of the Dow's rise. For 2000, Orlando and Galvin remain bulls and Dickey a bear. Meanwhile, the best picker of individual stocks was Hugh Johnson of First Albany, whose choice, Sun Microsystems, gained more than 260% through mid-December. The worst: Jerry Dombcik of McDonald Investments, whose pick, Elder-Beerman fell by about 50%. Who will take top honors in 2000 is anybody's guess. But if recent history is any guide, the odds are good that the consensus--and even some of the biggest bulls--will prove too bearish. By ANNE TERGESEN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Will the Bull Outrun Predictions Again? TABLE: Business Week Market Forecast Survey for 2000 (.pdf) Nasdaq, Shmasdaq. Two Out of Three Ain't Bad INTERACT E-Mail to Business Week Online | |||
