The Bulls Are Still Running
- 2000 19 Jan
What a year 1999 was. All the major indices hit record highs or were close to it. So, where do we go from here? At this point, it seems easier to predict where we will be in the next 100 years than the next 12 months. Nevertheless, we can say that we are still optimistic and running with the bulls.
With Y2K part of history, the big story of the year 2000 will be the technology sector once again. Technology, especially related to the Internet, was the way to get rich in 1999. Technology sector specific mutual funds gained on average over 100%, and Tech IPOs made yesterdays nobodys into todays millionaires (and billionaires).
How long can this crazy stock boom continue? That is the main question occupying analysts and investors today.
The current economic expansion has gone on so long that it will set an all-time record this year. Growth stocks have soared to seemingly unsustainable heights. And yet, each time it looks as though the market finally has to pull back, it rises even higher.
Stock market forecasters are not the only ones who are a little perplexed. Economists have the same problem. It seems every time they project the next quarter's growth, they underestimate - not by just a fraction, but often by more than a percentage point. This endless stream of positive surprises provokes those questions that contrarians keep asking: will the tech stocks finally crack? Will value stocks ever perk up? Will the stock market ever return to traditional levels? Or are we really in a New Era?
In fact, there is no longer a question of whether we are in a new era. The market has already answered that question. But having said that, it is also a truism that historical patterns inevitably reassert themselves, if you look beyond the specific questions to more general ones.
Many specifics about investing have changed since the 1982 recession. But long-term market trends have not altered much. And the secret to making large stock market profits safely over the next year depends on your being able to distinguish between transient market behavior and permanent shifts.
In brief, the US economy really is almost as dynamic as it appears. And while stocks probably will not be able to keep up the fantastic pace of the 1990s, odds are at least that they will keep rising for another year.
Nonetheless, there are far more risks for investors than there were three years ago. Inflation is rising, not quickly, but the trend is up. The other danger is recession, and while a slump is not in sight, it cannot be ruled out entirely for the future. And there are less dire risks, too. Federal Reserve chairman Alan Greenspan has kept interest rates as much as a percentage point too high for most of the past five years. And he is back for another term.
All these crosscurrents demand a more refined portfolio strategy than investors needed in the 1990s. The most popular stock groups continue to post impressive gains, even in the current interest rate climate. But the rest of the stock market is not nearly so dynamic. In fact, the divergence among stock valuations since 1997 has been extraordinary.
If tech stocks are rocketing and the average is flat, then something must be going down. And value stocks sure are. The cheapest 10% of publicly traded companies are down more than 25% over 18 months (click here to read what is happening to Value funds).That is the worst and longest decline for cheap stocks in 40 years. Cyclical companies, such as automobile, home building and retail stocks have all been performing poorly. Because it would bring down inflation and interest rates, such a slowdown would be good news for the long-term health of the economy - and the stock market - as long as it does not turn into an outright recession.
If there is a prominent warning sign today, it is that a shrinking number of stocks are carrying the market averages higher. Such divergences are a sign that a bull market is running out of gas, but do not expect that to happen in the next couple of months. Clearly, the risk and potential volatility of the stock market is rising. So you might think it would be smart to sell everything and put your money in the safest income investments. After all, from today's levels, stocks are statistically likely to earn only single-digit returns. If you can get 8%, say, on select income investments, why bother owning stocks?
Then again, the doomsayers have missed the technology gravy boat for about half a decade now.
Some Reasons to Continue to be Optimistic about Tech this Year.
The World Wide Web will continue to dominate the high-tech story. The coming year will see the emergence of lots of 'information appliances, devices simpler and perhaps less expensive than PCs that are intended to bring the Net to the two-thirds of US households that do not have access to it now. The appliances are just starting to trickle to market, and many designs are little more than gleams in their developers' eyes. But the industry is betting that they are the wave of the future. Even Microsoft is pushing ''Web companions,'' which basically consist of a Web browser, an e-mail program, and nothing else, as an alternative to Windows PCs.
At the same time, cable modems and a high-speed phone service, called DSL (digital subscriber line), will make real progress in displacing slow and unreliable dial-up lines as the path from homes to the Net. It will still be three to five years before broadband Internet access becomes pervasive. The process, however, is getting help from new, seemingly unrelated legislation that ends the prohibition on satellite broadcasters, such as DirecTV, carrying local stations. The ban on local broadcasts had given cable a big competitive advantage over satellites, and its repeal should spur the cable companies to promote another service that satellites cannot: fast, always-on Internet access. The new aggressiveness by cable providers should, in turn, spur sluggish phone companies to speed the rollout of DSL--a win all around for consumers.
The Internet also will increasingly take to the air in 2000. Web-enabled wireless phones, which are becoming important tools in Europe and Asia, made their appearance in the U.S. in late 1999. Right now, they are mostly curiosities. It is cool to get instant stock quotes or a weather report on a wireless phone, but once the novelty wears off, you are left with the reality of a tiny display and horrible data entry. However, soon you will see new services, such as trading and real-time traffic reports, that will be valuable enough to make a Web phone worth the trouble. In addition, there will be new handheld wireless devices. And by late in the year, we will see a new wireless technology called Bluetooth that lets all of your portable devices communicate with each other. In addition, the online revolution is and will even more so gain speed outside the US in Europe, Asia, and Latin America.
Our prediction: the year 2000 will be another Technology paradise. As long as investors know where to invest, the bulls will continue running. Just dont be lulled into a sense of security by galloping stock prices: the risk remains very, very real.
Click here for this week's IPO analysis and additional investment research from World Finance Net.