THIS year turned out to be a remarkably successful one for stocks and bonds, with markets spurred by declining interest rates, low inflation, and modest but steady economic growth in the United States.
The consensus view on Wall Street is that 1996 will be another upbeat year, especially for stocks. But total returns are expected to be well below 1995 levels, reflecting a slowing economy and lower corporate profits.
Market experts have the following tips for investors:
*Remain in stocks, but be ready to weather a modest correction (decline in value) of 5 to 10 percent.
*Invest a little at a time, such as monthly, so you don't buy all your stocks at a peak price.
*Be ready to shift strategies in the event of unexpected economic conditions.
"1995 was just extraordinary for financial markets," says Jonathan Steinberg, editor in chief of Individual Investor, a monthly magazine in New York.
"Everyone is now saying, 'The market just can't keep going up.' But I'm not so sure of that. 1996 may be a very strong year for stocks," Mr. Steinberg says, pointing to low inflation and expectations that the Federal Reserve will make additional cuts in interest rates.
Moreover, presidential election years have usually seen a solid performance in the stock market, he notes. The White House and Congress try to ensure that with fiscal or other measures.
Steinberg says there could be a modest correction, perhaps in January.
Christopher Beck, vice president of investment firm Pitcairn Trust Company, also foresees a possible modest correction next year amid a climbing market. The Jenkintown, Pa., portfolio manager expects no recession.
Mr. Beck predicts total returns from stocks in 1996 will be about 7 to 10 percent. Though that is down sharply from this year's 35 percent or so, Beck says investors should not be discouraged. Remember, he says, that yields on bonds and other fixed-income investments such as bank certificates of deposit will also likely fall during the coming year as the economy continues to slow. Thus, the stock market will remain the paramount place for most investors.
Ronald Stribley, a portfolio manager at the Glenmede Trust Company in Philadelphia, also anticipates total returns running up to about 10 percent in 1996. (Glenmede has assets of $8.5 billion under management.)
Though not ruling out a slight market dip, Mr. Stribley's main advice is: "Don't be afraid" of investing in stocks, despite the huge run-up in share prices in 1995.
Stribley says he does not believe in "market timing" - buying specific stocks before they go up, selling just before they go down. "Individuals should buy into the market through dollar-averaging," he says. That is, invest a steady amount of money every so often, whether in individual stocks or mutual funds.
By dollar averaging, a person may buy some stocks when the market is overvalued. But the approach enables one to buy more shares if stock prices fall.
As for individual stocks, where are these experts putting their money?
Each December, Steinberg releases a list of 25 stocks expected to post gains of 50 percent or more the following year. The list, called the "Magic 25" and printed in his magazine's January issue, has exceeded major market indexes for four straight years. This year, the portfolio shot up more than 60 percent, almost doubling the gains of the Standard & Poor's 500 stock index.
Steinberg looks for companies in unique situations. The hottest stocks on the Magic 25 list for 1995 included McAfee (an antivirus software firm), Interneuron (a pharmaceutical company), and VTEL (videoconferencing) - all over-the-counter (Nasdaq-listed) stocks. They shot up more than 400 percent, 300 percent, and 200 percent respectively. VTEL has been put back on the list for 1996. The new list also includes Theragenics, a medical supplier, and Prins Recycling, an environmental firm. Both are Nasdaq-listed.
Beck manages money at Pitcairn, which gears its business to high net-worth individuals and families. Even if you find it hard to qualify ($2 million minimum investment) with Pitcairn, it may be interesting to know what kind of stocks Beck is optimistic about for 1996.
Beck seeks unusual companies that show promise over time, such as Sealed Air, which makes the packaging material with small plastic bubbles that kids (and some adults) love to squeeze and pop. Or Teleflex, an aerospace, machinery, and medical-devices company. Both are listed on the New York Stock Exchange.
One analyst who continues to buck an overly upbeat view is James Stack, editor of InvesTech, a market report based in Whitefish, Mont. He says US financial markets might be in an artificial "bubble" - that is, an overwrought market pumped up by the entry of thousands of marginal investors who would not normally be players. Mr. Stack sees parallels to the periods just before the 1929 and 1987 market crashes. Thus, he urges investors to "think a little defensively" in 1996. They might, for example, buy a reputable energy or telecommunications stock. He urges investors to consider conservative mutual funds rather than aggressive-growth funds invested heavily in technology.