How much higher? For the market, 1997 had peaks and valleys. What's to come this year?

Looking at the stock market over the last three years, it's hard not to feel just a little smug. Since 1995, the Standard & Poor's 500 has hit the jackpot, returning its investors a whopping 195%. That's a gain that would have whisked a $1,000 investment up to $1,950. Compare that to a historic average rise of 12% annually and there's little wonder why so many might feel blessed. But if 1997 was such a good year, why are so many people worried?

That feeling of apprehension may be rooted in some very jarring signals that came at the end of last year. On October 27, "Black Monday" reared its ugly head to knock 7% off the Dow Jones Industrial Average. No sooner had the market rallied from that setback when economic woes started to knock over Asian economies like a row of dominos. But all wasn't entirely well on U.S. shores either. Several companies--Oracle and Oxford Health among the most noteworthy--turned in lackluster earnings and promptly saw their shares slaughtered in a sell-off.

Couldn't be that after a three-year orbit, the market is finally returning to earth?. We couldn't help mulling that over when BLACK ENTERPRISE convened its annual Investment Roundtable on January 15. Ironically taking place this year on Martin Luther King's birthday (and on a day when the Rev. Jesse Jackson visited New York City to admonish Wall Street for its neglect of the African American community), it was reassuring to sit with four of the best minds in the investment business--all African American--to map out what's to come for both stocks and bonds in 1998.

C. Kim Goodwin, whose specialty is growth investing, joined us fresh from her move from Putman Investments' Vista Fund to American Century to head up its Growth Fund. Mark D. Lay, a bond market expert whose money management firm just launched two mutual funds, was also on hand to guide us through the world of fixed income. Eric McKissack, whose Ariel Appreciation Fund finished first among its peers last year, lent his insight from the school of value investing. And to round things off, Peggy Woodford Forbes, founder and head of the institutional money management firm Woodford Gayed Management Inc., brought her expertise in large-cap and growth stocks to the table.

What follows is a summary of the highlights of the gathering, including guidance from our experts to help you plain your investment strategy for the rest of the year. The discussion essentially keyed in on six major points--from interest rate expectations to the impact of foreign markets and currencies on our own. Additionally, panelists supplied their best stock and bond picks for 1998 to boost your portfolio.

LOW INFLATION MAKES FOR LOW RATES

To get a gauge on what's up for 1999, we tackled the question of interest, rates, which can make or break the stock and bond markets. High rates lure money from the stock market while lowering share prices. But low interest rates send investors looking for higher gains to the stock market, while simultaneously increasing the worth of bonds with higher yields. Our panel's fixed-income expert, Mark Lay, thinks rates will fall in the first half of the year, but could come under pressure later in 1998.

MARK LAY: I see a very positive year ahead for both the stock and bona markets. Interest rates will probably go, down in the first part of the year and perhaps rise a little later on. We also don't expect Alan Greenspan's Federal Reserve to raise rates this year.

In 1997, the U.S. economy enjoyed strong growth and a rise in employment. Those are factors that might overheat the economy and worry the Fed about inflation. Nevertheless, inflation remained low At 1.7% for the year--the best number since 1965.

A number of things will keep a lid on prices. For instance, the U.S. dollar has been strong in relation to European and Asian currencies. That means our goods are more expensive overseas, but it also means a rise in cheap imports, which in turn keeps prices down. Commodity prices have also behaved well. Look at oil: early in 1997, it was as high as $20 a barrel. Now it's under $17.

There are indications that the bond market feels the turmoil in Asia will slow the economy and the Fed will cut rates to keep things going strong. I don't think the Fed will do anything when inflation is this low. So bond yields on the 30-year Treasury, which as we speak are at 5.73%, could go down. We could touch 5.50%. But I believe as the second half of the year rolls around, we'll see signs of stronger economic growth, which should push rates up. At the same time, if you look at the fact that unemployment is at a low, which could push wages up, there's no way the Fed is going to lower rates.

AN UPWARD SWING FOR THE MARKET?

As Lay pointed out, the bond market won't interfere with rising stock prices. But with the exception of Lay, our panel thinks stocks will have trouble matching the kind of gains made in last year's market.

LAY: Based on the current economic factors, I see no need for a major correction in equities. We're very positive for 1998. In fact, I wouldn't be surprised to see another 20-plus year. A lot of people are saying, `We were up 30% last year, there's no way we could repeat,' but there are a number of positives they tend to overlook: low inflation and consumer confidence being at all-time highs.

PEGGY WOODFORD FORBES: To my thinking, corporate profits could rise between 5% and 8% this year. Right now, though, I think one thing to worry about is the fact that the market is at an almost excessively high valuation. The S&P 500 is selling at a price-to-earnings ratio (P/E) of about 20 times 1998 earnings levels--among the highest ever. Since we're at the high end, there's a good chance the market will undergo a correction. That's a good thing, because once we get stock prices down to a more sensible level, the market should be primed for another move higher. By 1999, we could see the next major move of the market, propelled by the technological revolution.

ERIC McKISSACK: I've got a temperate outlook as well. I think that the historically high P/E multiples can hang around for a while if the economic environment is benign, as it appears to be. I'm not predicting another 20% gain for the S&P 500 because I think the earnings growth will be less than what we've seen. Asia could put a damper on profits, and corporations are going to have a hard time beating out a good year like last year. I think we're in store for corporate earnings growth in the 6%-7% range for the S&P 500, and we'll see stock market gains for the same group in line with historic levels, say 10%-12%. And, let me note that the combination of slower earnings growth and high P/Es could make for a bumpy ride in a highly volatile market this year.

KIM GOODWIN: I don't think the market will be as strong as last year, when a "Goldilocks" environment of low inflation and good growth pushed the S&P up over 30%, with the Dow up 22%. Asia won't overwhelm the U.S. economy, but troubles there Will be a moderating factor in the stock market this year. And as Eric said, profit comparisons with 1997 will be tough. So, I'm looking for 10% or 12% on the upside for the market, fueled by maybe 7% or 8% corporate profit growth.

LARGE-CAP STOCKS SHOULD PROSPER BUT DON'T COUNT OUT SMALLER COMPANIES

Large-cap stocks--the big-name corporations that form most of the S&P 500--led the market's rally last year. Our experts look for more of the same in 1998.

WOODFORD FORBES: Large caps should perform very well this year. If the market gets volatile, investors will seek safety in many of the household names we know. Remember though, with a lot of people fearing `the Asian contagion' as they call it, many of the small- and mid-cap stocks could take off. That's because some investors might want to limit their exposure to big problems abroad, the kind big multinationals come in contact with.

McKISSACK: I think small and mid-caps are going to do relatively well, even slightly outperforming the larger companies in the coming period. So you'll see some of those companies more affected by the economic problems in Asia, but on the other hand, there are also many pure play domestic small- and mid-cap companies that will be less affected by activity over there.

JUST HOW MUCH WILL ASIA HIT THE MARKET?

Asia's problem spots--Thailand, Indonesia, Korea, and even Japan--seem mired in a quicksand of economic problems that won't go away. Our panel thinks that's going to hurt U.S. corporations, but not as much as you might think.

GOODWIN: Asia's impact hasn't yet affected U.S. corporate earnings, but it will soon. If you're competing with a major player in Asia, your rival's goods are going to be sold at up to 50% less, simply because of currency devaluation. That means you are not going to be able to sell as much in foreign markets or at home in the U.S. because of price competition. That phenomenon will hamper U.S. corporate profit growth.

LAY: A strong dollar hurts exports, but I think we've seen the highest levels of the dollar. If you look at our major trading partners, like Japan, Germany and so forth, the dollar's value will start to come down and limit any downturn in exports.

TECHNOLOGY STOCKS LOOK CHEAP BUT ASIA IS STILL A CONCERN

Tech stocks headed south the minute Asia's problems hit the headlines. Our panel says tech stocks will remain volatile this year but could present some tempting bargains to patient investors.

WOODFORD FORBES: Technology could face some rough going in the first part of the year. But some of these stocks are tremendous opportunities, if you're a long-term investor looking for good discounted ideas. Technology areas are very volatile, and that's where you're going to get the biggest bang; it's also going to be where you get the biggest disappointments.

GOODWIN: No matter what happens this year, we are in a technological revolution. If the sector is hit, I think you're going to have a lot of opportunities to buy stocks at cheaper prices during the year. I think there are some bargains in the sector that are very cheap and could bounce back quickly once they deliver good earnings in the first quarter.

McKISSACK: Tech is one of those sectors in the market that has been unduly punished by psychology. It's the kind of situation that can provide a good opportunity for investors but often with high risk.

PHARMACEUTICAL AND TELECOMMUNICATIONS STOCKS SHOULD FLOURISH

Finally, we asked our panelists to point out some of the stronger sectors, where you might look for additional stocks in the coming year. Here are some of their suggestions.

WOODFORD FORBES: Financial stocks have done well, and while I think mergers and acquisitions will continue, bank stocks might have a pause this year. We'll probably see at least 25% more of the financial firms disappear during continued consolidation. And, regional banks are still good to focus on as a private investor because there is less exposure to global problems in the regional area. Utilities and pharmaceuticals are also sectors that look inviting. Utilities in particular will benefit from lower interest rates.

GOODWIN: We like the pharmaceutical stocks, especially those with strong, new product pipelines. One example is Pfizer, which is launching three potentially monster drugs, one for schizophrenia, another for impotence and a third being a new antibiotic.

It's a surprise to hear a growth manager talk about utilities, but I think telecommunications and electric companies look good, one being WorldCom, which just took over MCI. They'll be able to work a lot of savings out of the deal, and MCI's long-distance operations look like they're about to turn around.

KIM GOODWIN AMERICAN CENTURY GROWTH FUND

Kim Goodwin is up for a challenge. Late last year, while helping guide Putnam's Vista Fund to a 23% total return for 1997, she heard from American Century, a Kansas City-based fund family that was looking for the right manager to set its Growth Fund back on track, Goodwin leapt at the opportunity.

Her new mandate is to find large caps--stocks with a market capitalization of $5 billion or better--provided they've got the wherewithal to grow faster than their peers. It's not enough to have a high projected earnings growth rate. American Century's emphasis is to catch a company's acceleration as quickly as possible. The means if a company's business is strong enough to help it beat Wall Street projections or even zip past analysts, Goodwin wants to benefit before anyone else.

Gillette (NYSE: G, $102) In an uncertain market, Gillette seems like the best of all worlds. For one, the company is a safe, household name investors could gravitate toward during the course of the year. Secondly, Gillette is a steady earnings grower, one that Goodwin feels could increase profits at a 17% annual rate over the next five years,

But Gillette stock is not cheap. At press time, it was trading at 34 times 1998 projected earnings. Still, Goodwin thinks the company stands a good chance of posting a 20% jump in earnings this year. Why? Market dominance helps: 81% of its sales come from products such as razors and shaving creams, where Gillette is the absolute leader. And to top it off, Braun, the German maker of household gadgets (and a company subsidiary), could be surprise beneficiary of a recovery in Europe.

Finally, Goodwin thinks Gillette's introduction of a new shaving system by mid-1998 will also boost profits and push the stock as high as perhaps $120 in the next 12-18 months.

Tyco International (NYSE:TYC, $44.50) A conglomerate that Goodwin feels is on track to grow earnings at a 20% rate over the next five years, while its stock trades at 20 times estimated 1998 earnings. Tyco spans a number of products. It makes disposable and specialty medical products, such as bandages and ankle braces. In addition to holding ADT--its electronic surveillance division--Tyco ranks as the No. 1 contractor for designing and installing fire detection and sprinkler systems. Only eight Wall Street analysts cover the company, and since Tyco isn't getting a lot of attention, Goodwin says it's s great time to capitalize on its earnings acceleration, especially with profits in line to rise 30% this year. She feels the stock could reach $60 a share over the next 12-18 months.

Microsoft (NASDAQ: MSFT, $140) Although everyone knows of Microsoft's recent antirust skirmish with the Justice Department, Goodwin feels a lot of investors have overlooked one important fact: the company dominates its business. Microsoft's operating system run 90% of the PC's in use today, and the company is busy expanding into automobiles and set-top boxes. Meanwhile, Microsoft has maintained earnings growth of 25% annually. Goodwin feels profits could take off in the second half of the year, especially as Microsoft begins another software upgrade cycle with the launch of Office 99 and NT 5.0 Goodwin feels the stock could reach $165 in the nest 12-18 months.

ERIC MCKISSACK ARIEL CAPITAL MANAGEMENT APPRECIATION FUND

To say eric McKissack had a banner year is putting it mildly. McKissack, who joined Ariel Capital Management in 1986, saw his Ariel Appreciation Fund top all comers in the mid-cap category in 1997, according to Lipper Analytical, with a 38% total returns vs. 31% for the S&P 400 mid-cap benchmark.

A traditional sort if value manager, McKissack looks for cheap stocks. This guides him toward companies whose P/E is at least 20% less than tag of the market and their industry peers, McKissack also says he looks for shares trading at 40% or more of the company's private market value--their worth should a suitor come along. Invariably, that guides McKissack's attention to out-of-favor companies. Wall Street has all but abandoned.

First Brands (NYSE: FBR, $27) People don't know First Brands, but they are familiar with the company's products, which include Glad food wraps and bags. First Brands is also the leading maker of Scoop Away kitty litter, a good business to be in since cats re now the most popular household pet in the U.S.

Early last year, though, First Brands came out with disappointing earnings and saw its stock promptly lose 15% in the market. But its shares have since rebounded. McKissack says earnings should become more consistent. Also, the stock looks cheap, trading at a P/E of 15 times for a company that should post earnings growth of 20% this year and 13%-14% annually over the next five years. McKissack thinks the stock could reach the low-$30s-a-share range in the next 12-18 months.

Whitman (NYSE: WH, $16) While Whitman recently spun off its Midas Mufflers and Hussman Food Refrigeration equipment businesses, the company hung onto the largest and most profitable franchise, Pepsi-Cola General Bottlers. Whitman also has a foothold in overseas markets, particularly in the former Eastern bloc, where it also holds Pepsi bottling rights for Poland and Latvia. Mckissack says the company, currently trading at $16 per share, could reach the low $20s over the next 12-18 months.

Allergan (NYSE: AGN, $34.50) has struggled to over come a mature product line of contract lens products. While contact lens wearers used to spend an average of $35 a year on solutions, that outlay has decreased to a current price of about $18. Now, says McKissack, Allergan has come up with new products to boost earnings.

One new product helps to relax the muscles that cause some patients to have eye movement disorders. Another cures severe psoriasis. A third product is a treatment for patients who've just undergone cataract surgery. In all, Mckissack says, the company could boost earnings 15% annually over the next few years. Allergan currently trades at a 16 P/E multiple, and according to him, the stock could reach low $40s in the next 12-18 months.

PEGGY WOODFORD FORBES WOODFORD GAYED MANAGEMENT INC.

As founder of the institutional money management firm Woodford Gayed Management Inc., Peggy Woodford Forbes wants to have her cake and eat it too. As a growth manager, she looks for large companies that are growing earnings at 10% average annual rate. To make sure those earnings are coming from profitable business and not just cost-cutting, she looks to revenue growth that is running about 10% a year as well. But, she's not willing to shell out just any price for stocks. Typically, she won't jump at a company unless its P/E is around that of the S&P 500. her strategies have kept her in the top rankings of money managers around.

Johnson & Johnson (NYSE: JNJ, $67.25) We're all familiar with Johnson & Johnson, one of the world's largest pharmaceutical companies with a product line chock-full of household names like Tylenol, AccuView contact lens products, reach toothbrushes and Band Aid bandages. But there's more to a company that's targeted to grow profits at a 14% clip and currently trades at 27 times estimated 1998 earnings, says Woodford Forbes, Johnson & Johnson's pharmaceutical division is top-flight, offering Hismanal, an antihistamine, and Ortho Novum, the leading oral contraceptive on the market. J&J's research and development efforts have kept the company's pipeline well stocked. That's why she thinks the stock can reach $70-$75 a share in the next 12-8 months.

Wal-mart (NYSE: WMT, $39.50) As the largest retailer in the U.S., Wal-Mart could just sit back and let its more than 3,300 stores reap in profits. Not so, Wal-mart is busy overseas, where it already has over 300 outlets, while conjuring up new ways to boost revenues at home, says Woodford Forbes. For starters, look for Wal-Mart to target Mexico, latin America an Asia, she says. But she is encouraged by the company's thrust into new territories that should keep earnings growing at a 15% rate. Wal-Mart is also expanding overseas, and at home, the retailer's new vista is on the superstore--outlets that combine household goods and supermarket under one roof. For its existing stores, the company has set up a database larger than any deployed in the retailing arena, which lets Wal-Mart regionalize and customize each store by determining a product mix that suits local customers. Woodford Forbes says wal-Mart shares, currently trading at a P/E of 26, can reach $45-$48 in the next 12-18 months.

SBC Communications (NYSE: SBC, $75.25) No matter what becomes of the Telecommunications Act of 1996, SBC Communications stands to come out ahead. That's because SBC has its hand in local, cellular and PCS services and has taken an aggressive stance in developing new businesses, says Woodford Forbes. Overseas, SBC has been an aggressive investor as well, another factor that is helping to boost earnings. The company currently holds 10% of Mexico's primary telecom company, and has stakes in other phone service providers in France and Latin America, she says. Trading at about 21 time projected 1998 earnings, SBC should continue to grow earnings around 15% annually. As an extra treat, SBC's dividend gives investors a 2.4% yield, which exceeds the S&P 500's 1.69% average yield. Forbes thinks the stock will rise to $85-$90 a share over the next 12-18 months.

MARK LAY MDL CAPITAL MANAGEMENT

An institutional money management firm, Mark Lay's MDL Capital Management made a big crossover move last year, opening up two mutual funds in November--one investing primarily in stocks, the other in bonds. Lay's done particularly well in the later, logging in a 10.48% gain for 1997 (compared to the Lehman Government/Corporate Bond Index, which rose 9.76%).

Since 1993, his numbers are equally impressive: 53.4% compared to 44.3% for the index. Lay beats the benchmark even though his portfolios are conservative, AAA quality, holding only low-risk Treasurys and some mortgage-backed securities like Ginny Maes.

The bond market. Lay says investors saw returns as high as 10% in 1997. The bond market looks to have another good year, he says, but gains won't be as high. Here a few strategies he suggests:

Look for longer maturities. Lay feels a number of factors are pushing down on interest rates over the next few years. Now that the U.S. government is running in the black whit a balanced budget and quite possibly a surplus, rates could well be coming down. "Interested rates will be substantially lower five years from now that they currently are," he says. "Inflation should remain low and economic growth is moderate, all of which bode well for long-term bonds."

How low? Lay says the yield on the benchmark 30-year Treasury could fall as low as 4% in the next few years. So if you're wary about stock market volatility over the next year, or if you've got a specific savings goal ahead and would like to get a good return on your money, he says Treasury bonds maturing in 15-30 years could be a good bet. As of press time, a 30-year T-bond was yielding 5.73%

Sell off current bonds and buy those with shorter maturities. Lay says if you've bought bonds over the last 12-16 months, it might be a good time to sell and lock in those short-term gains, and reinvest your money in five- or seven-year bonds.