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MARKET MAY GET REALITY CHECK IN '99.

Byline: Deborah Adamson Daily News Staff Writer

No more Internet frenzy. No more illogical speculation.

The stock market will tread water in the first half of 1999 and improve methodically in the last half of the year once the U.S. economy shakes off the effects of the Asian financial flu and Russian ruble hangover. Investors will buy value and shun speculation.

Or so say some of the nation's leading financial analysts.

Then again, analysts also predicted a quiet period on Wall Street last year and declared 1998 a bear market after the correction in July, only to announce the bull had returned after the market roared to new heights in November and December.

But back to the new year: Rational exuberance is out; reality is in.

Arnold Kaufman, editor of the S&P Outlook, the investment newsletter of Standard & Poor's in New York, predicts 1999 will bring a dose of reality to investors who spent the last two months of 1998 buying Net stocks.

Instead of jumping into stocks with astounding price-to-earnings multiples, investors will begin to adopt a ``show me'' attitude, he said. An Internet shakeout will be coming as investors sort out the winners and dump the losers.

And the stock market, in general, will cool off.

``From a technical standpoint, it looks like the market is going to top out fairly soon,'' Kaufman said. ``Sentiment is much too positive, too bullish.''

He believes the market should peak in January or February and go through a sideways consolidation phase where it doesn't make new highs or lows but stays within established high and low parameters.

If market breadth remains narrow, where gains come from a small group of stocks and not the broad market, there could be a nasty correction, Kaufman said.

But mitigating the situation are two expected interest rate cuts in 1999, he said.

As the U.S. economy regains strength in the last half of 1999, and as Asia begins to shake off its malaise, the year should end on a positive note, Kaufman predicted.

But Don Wellenreiter, a commodity trading adviser at Peregrine Financial Group in Westlake Village, warned the end of 1999 might ``get wild'' as 2000 nears.

``You hear so much about the Y2K problem,'' he said. ``Even if you don't believe in any of (the doomsday theories), from a safety aspect, most people will pull money out of the bank.''

In fact, the Treasury Department recently began printing more money in anticipation of a cash run at banks, which only keep 2 percent of deposits at hand, Wellenreiter said.

Investors could pull money out of mutual funds, stocks and bonds as well.

The financial markets ``will be tested severely,'' he said.

Like they weren't in 1998? First there was the Asian economic crisis, which started in early 1997 but was still a strong drag on the markets as 1998 dawned. Things didn't get much better in the summer of 1998, when Russia defaulted on its bonds and sent the world reeling.

The bull backed down and the bear showed its fangs. Small-cap stocks technically were in a bear market - defined as a decline of 20 percent or more - while large-caps came close. The Dow Jones industrial average reached a low of 7,539.07 on Aug. 31, 400 points below its performance at the start of 1998.

Corporate earnings slowed down. Some were affected by the Asian crisis while others blamed the cooling U.S. economy. Hedge funds, particularly the Nobel laureate-run Long Term Capital Management L.P., took a big hit after making the wrong call in world bond markets.

Ironically, the two biggest news stories of the year - the impeachment of President Clinton and the bombing of Iraq by the United States and Great Britain - barely registered a blip on Wall Street's radar. Small potatoes, apparently, compared with Disney's video sell-throughs in Asia.

``Investors had a kind of what-me-worry? attitude,'' Wellenreiter said. ``As long as their 401(k)s are doing well, they don't care what's going on in Washington.''

It didn't hurt that the Federal Reserve Board of Governors, through its Federal Open Market Committee, cut the federal funds rate three times.

The move drove the bond market higher because it makes existing issues more valuable. Meanwhile, bonds also benefited from a global crisis. The shaky financial straits in many parts of the world drove capital into a safer haven: U.S. treasuries. Indeed, long-term bonds returned 19 percent this year, among the best in decades.

Stocks rebounded. The Dow, which started the year at 7,908.25, rose to a high of 9,374.27 on Nov. 23. It ended the year at 9,181.43, up 18.13 percent, including reinvested dividends.

The Standard & Poor's 500 Index recovered from a Dec. 31, 1997, showing of 970.43 to a high of 1,241.81 on Dec. 29. It ended the year at 1,229.23, up 26.7 percent.

Nasdaq also performed well. It rang in 1998 at 1,507.35, rose to a high of 2,181.77 on Dec. 29 and ended higher at 2,192.71, up 40.20 percent.

The Daily News Index, which tracks 50 of the largest publicly traded companies headquartered in the San Fernando Valley area, swung from 121.30 to 147.04 and closed at 142.22, up 17.91 percent for the year.

Dow Jones Industrial Average in 1998

As 1998 began, no one expected the stock market to continue its winning streak for a fourth straight year. When the Dow Jones industrial average plunged to the 7,500 level in late summer after setting a new high of 9337.97 in July, no one expected it could come back to set a new record.

Dec. 31, 1997: Closed 7,908.25

April 6: First close above 9,000

July 17: New closing high 9337.97

Aug. 27: Drops 357.36 points on worrries about global economy

Aug. 31: Plunges 512.61 to 7539.07

Sept. 8: Rises 380.53, biggest one-day point gain after Federal Reserve Chairman Alan Greenspan makes reassuring statement

Oct. 15: Federal reserve unexpectedly cuts interest

Nov. 23: New closing high, 9374.27

Dec. 31: Closed 9,181.43

CAPTION(S):

Chart

CHART: Dow Jones Industrial Average in 1998 (see text)

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Publication:Daily News (Los Angeles, CA)
Date:Jan 3, 1999
Words:1051
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