THE bears ruled Wall Street and many of the global markets in 1994. But if the United States can avoid a recession, some analysts predict a more bullish market by late in 1995.
How bearish was '94?
Sixty-five percent of all listed stocks lost value, according to Larry Wachtel, a vice president with investment house Prudential Securities Inc., in New York City.
As of the end of last week, the Dow Jones industrial average had gained about 2 percent in value for the year, compared with a more typical yearly gain of about 15 percent since 1980. And the Standard & Poor's 500 index, which is a broader measurement of stocks than the 30-stock Dow, is actually down about 2 percent for the year.
The bond market hasn't fared much better, Mr. Wachtel says. It was jolted by sell-offs linked to rising interest rates - which eroded the value of existing bonds - and difficulties within the municipal-bond market.
But Wachtel says bond-market concerns are ebbing.
The Orange County, Calif., situation, in which the county was forced into bankruptcy after losses from high-risk investments, ``created a climactic selling wave'' for financial markets, Wachtel says. But ``the [negative] emotions growing out of that incident'' have begun to fade.
Once again, this year as last, the markets will focus on the interest-rate puppet master - the Federal Reserve Board.
``A lot of what will happen in 1995 will depend on what [Federal Reserve Chairman] Alan Greenspan does,'' says Gene Jay Seagle, president of Tactics and Technics, a financial-consulting firm in Weston, Conn.
Some economists worry that the Fed may hit the interest-rate brakes too hard and the US economy will skid into a recessionary heap. Mr. Seagle predicts that the Federal Reserve will slow the economy ``just enough to ensure a soft landing.''
``Historically,'' he says, ``the last two years of most presidential administrations have been good years for financial markets.'' Focused on the 1996 elections, both Congress and the White House will undertake a mix of legislative and fiscal measures to ensure steady economic growth, Seagle predicts, despite the political divisions in Washington between a Republican-led Congress and the Democratic White House.
Then, of course, there's the traditional seasonal uptick, fondly dubbed the ``Santa Claus Rally.''
It starts as bargain hunters move in right after Christmas. Investors typically sell off ``loser'' stocks at the end of the year to offset otherwise taxable capital gains, Seagle explains. Most of that selling has now passed, he says, and St. Nick's rally is well under way.
Gregory Nie isn't one to put a damper on Yuletide cheer. But the chief technical analyst for the investment house Kemper Securities Inc. in Chicago says his charts indicate that the best financial markets of 1995 will probably come ``in the third and fourth quarters of the year, rather than the first half of the year.''
THE reason for the late market liftoff, Mr. Nie says, is that there ``are still a number of pressures encouraging selling,'' such as political uncertainties in Washington and the possibility of lower corporate earnings resulting from rising interest rates. Thus, the stock market could move downward in the first and second quarters.
``But once that occurs, then there is potential for an upside movement, with the Dow perhaps even heading towards the 4,400-point level,'' Nie says. The Dow is currently trading at slightly over the 3,800-point level.
Stock strategists at the New York-based brokerage firm Salomon Brothers Inc. also are concerned that the bear may stick around into 1995. They're predicting a further correction in the first half of 1995 in the US market, before the buyers send stocks higher later in the year.
Bargain hunters may be tempted to search overseas for better returns. The plunge of the Mexican peso against the US dollar has been a tough year-end ``blow'' to the concept of investing in Latin America, Wachtel says.
He still favors European stocks, expecting investors to profit from Europe's economic recovery, which has lagged behind the US recovery.
While most stock technicians here continue to recommend buying some international stocks, the consensus is that smaller investors are better off buying into a diversified portfolio of global stocks, rather than buying stocks from a single country or region. Another global approach: Investors can buy US companies that derive a large percentage of their earnings from abroad.
Investing abroad may protect you from some of the fluctuations hitting American markets in 1995. But financial analysts stress that, with the fast-paced and electronically interlinked nature of global markets, unexpected events can very quickly produce repercussions elsewhere.