Market Experts Sing Same Song: Expect a Downturn.

FOR the past five new years on Wall Street West, we have heard the same tune, and we aren't talking about "Auld Lang Syne."

The song we now know by heart goes like this: "We can't have another year as good as the one just ended."

This epic bull market defies the imaginations of veteran money managers and others. Who could have predicted that the Nasdaq Composite would rise by more than 80 percent in 1999?

It's easy to forget that when President Clinton took office in 1992, the Nasdaq had barely crossed 500. (It now stands at about 4,000)

A current popular book predicting a "Dow 36,000" in the not-too-distant future might have the right number but the wrong index. According to a joke making the rounds last week, the Nasdaq will get there first.

But the tech-laden Nasdaq index was just part of a mostly buoyant 1999. The quick stats: The blue-chip S&P 500 index rose almost 20 percent; the Wilshire 5000 was up about 21 percent; the venerable Dow Jones Industrial Average was up about 24 percent. Even the long-lagging Russell 2000 -- an index of smaller stocks -- rose more than 14 percent.

A double-digit return like 14 percent used to be considered pretty decent; now it's dismissed as the picture of mediocrity.

So the past is prologue, as they say, except when it isn't. What do our local market experts see in 2000?

Jeff Rollert, managing director at ALM Advisers in Pasadena, a bond shop, predicts the year will start with a spurt.

One reason is that because all across America, heads of households are stashing away a few hundred bucks "just in case" -- a little insurance against the Y2K thing. Armed with cash, America's families will do what they do best -- go shopping, which will aid the overall economy.

Meanwhile some investors will jump off the sidelines and sink more money into the market. "With Y2K out of the way, you'll see the real party after New Year's," said Rollert.

The Fed is watching

But the Fed doesn't want any more parties, especially when the economy is already growing at nearly a 5 percent annual rate (high by recent standards). Some regions are crying about labor shortages -- a harbinger of inflation, which is Public Enemy No. 1 as far as the Fed is concerned. So the ever-vigilant Central Bank will likely crank up interest rates early next year, and that will depress the bond market.

But given the stable inflationary environment, the second half of the year should see a settling down of interest rates, which Rollert believes will be good for bondholders. Moreover, with earnings not quite soaring skyward (as analysts seem to predict at the start of every year), the market could cool considerably.

"Corporate earnings are good, and will be good, but not that good, and there will be some disappointment," Rollert said.

He points out that in order to hit projections, some executives pulled out lots of stops in 1999 by fast-forwarding earnings or setting aside less reserves to cover losses. If too much of that comes to light, it could soften stocks and prompt some investors to turn to the bond market.

Usually, the bond market affects the stock market. But Rollert believes that nowadays the roles are reversed. If earnings look a little dicey, and the stock market starts drifting, then bonds may come back into favor. It shouldn't take a crash on Wall Street to make that happen.

"People forget that the end of the bull market doesn't necessarily mean it goes down. It could just go sideways for a long time," Rollert said. "In that scenario, bonds look fine."

In a bearish frame of mind is Charles Beiderman of Trimtabs.com, the Santa Rosa-based market watchers. Beiderman tracks money flows into mutual funds and on Wall Street.

So what problems does he see? "There is a huge new issues calendar in the first quarter," he said.

Lots of IPOs

Indeed, as much as $30 billion in initial public offerings or other equity issues are slated to appear. Add to that another $30 billion of "insider stock" -- equity given last year to management and others in incentive plans - that becomes eligible for public sale after SEC-mandated time constraints expire.

True, corporations have ongoing stock buyback programs. There also will be some cash-financed mergers sopping up equity, and mutual funds will continue to grow and invest. But overall, "too much supply, and not enough demand," said Beiderman. Look for a soft first quarter, he said.

And it might last longer than just the first quarter, according to Ken Luskin, founder of Malibu-based Intrinsic Value Asset Management, who suspects that the bubble might finally burst for tech stocks, even the likes of Microsoft, AOL, Amazon.com or eBay.

"Back in 1974, Merck (a big drug stock popular at the time in the hot pharmaceutical sector) topped out. It wasn't until 1984 that investors got their money back on that stock," even though Merck posted increasing revenues and earnings almost the whole time from 1974 to 1984, Luskin said.

Though well-managed, the large-cap tech stocks are richly priced today, warned Luskin. "If they go out of favor, it could be 10 years getting your money back," he said.

In fact, the whole market is pricey, and a long-term general correction is not inconceivable.

Ten years? Maybe not that long, said David Ryan of Ryan Capital Management in Santa Monica, but a correction could take place in 2000.

"You could see a shift out of the tech stocks and into the other stocks that have been down, out of favor, stocks in basic industries, or natural resources," Ryan said.

How about the long-suffering small-cap stocks? "Well, the problem is that these companies can have great years, but nobody notices," Ryan said. "Probably nobody will notice in 2000, either."

Tech is still the way

How about the real estate investment trusts that were out of favor in 1999?. "I see higher interest rates in 2000, and that probably won't be good for RElTs," he said.

If investors continue sinking money into new-media stocks, keep your nose to the wind. "It seems like Internet stocks live and die in dog years," Ryan said. "One year for an Internet stock is like seven for a regular company. They double and triple, get cut in half, then reach new highs. In the old days, if a stock got cut in half, it stayed down for years."

But many market mavens, even as they cautioned investors against the pricey, erratic new-media stocks, say tech is still the way to go.

So, in general, our mix of market experts said we can't have another year as good as the one just passed. Which is pretty much what they said last year, and the year before that, and before that.

Contributing Columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.