Hard to hold down?

Analysts maintain high hopes for the bull market's raging run into 2000

Strike up the band! Bang the drums.

With the shift to 2000, the stock market parade is once again marching along. And once again, market analysts expect high-technology stocks to lead the parade, followed by many growth-company stocks.

Technology, especially the Internet, led the way last year, with high-tech mutual funds doubling in value.

Yes, a few stumbling blocks could slow this year's march: Valuations are sky-high at many a dot-com, the market has sent hints of a correction given last week's Nasdaq plunge, and some market watchers expect another interest-rate hike by the Federal Reserve in early February.

But all that aside, guess what else is happening? To a striking extent, many observers are saying 2000 already looks similar to 1999.

"The momentum is still with technology," says Elaine Yager, vice president and senior technical analyst for the financial firm Herzog Heine Geduld. The good news, she says, is that the market should end 2000 higher than at the beginning of the year.

The downside, she says, is that it may take some slipping and sliding between now and December to get us there.

In fact, Ms. Yager wonders if we may not already be in the early stages of a downturn, following massive run-ups at the end of last year that carried the major market indexes into record turf.

Investors have been busy taking profits and selling some securities - especially technology issues - for tax-related purposes. Whether last week's turbulence suggests a deeper threat to the market remains to be seen.

Counting in total returns (with reinvested dividends), the Nasdaq Composite Index soared some 86 percent in 1999, with the Dow Jones Industrial Average up 27 percent, and the Standard & Poor's 500 Index up 21 percent.

In the case of mutual funds, "almost anything with the word 'growth' in it did well," laughs one wag.

International and global funds also rang bells during the fourth quarter, thanks to huge gains in Japan, the Pacific Rim, Latin America, and, to a lesser extent, Europe.

Bond funds, alas, had a dismal fourth quarter, and year. Folks who put a lot into gold, expecting inflationary pressures to add shine to the precious metal, received little in return.

By historical measurements, 2000 should be a solid year for mutual-fund investors. Now's the time to watch closely. It's generally believed that the first week of trading can hint at the market's direction for the year.

Of course, this is a special year. Presidential-election years, over time, have proven to have more winners than losers, in terms of stock-market gains. Moreover, all major economic indicators show the US economy continuing to expand. Unemployment is low, inflation is under control by historical measurements, and consumers continue to flip open their wallets.

The year 2000 should be "gung ho" in terms of a strong economy, with no recession in sight until perhaps the first half of 2001, says Richard Babson, president of Babson-United, a financial-research firm in Watertown, Mass.

Yet, a number of challenges loom, including the possibility of downward pressure on the dollar and higher interest rates. Mr. Babson, for his part, sees the 30-year US Treasury bond edging up to 7 percent by year end. Higher rates tend to work against stock gains.

"I'm bullish, but cautious," says Marion Schultheis, a managing director of mutual fund firm J.&W. Seligman.

Ms. Schultheis, who heads up Seligman's growth-stock sector, says that to equal or exceed gains in 1999, the market needs "a kicker" - a sector or area of activity that could jump start the entire market. But so far, she has not found it.

Even if there were to be a modest correction in the first quarter, it would not derail the long-term bull market of the 1990s, says Larry Wachtel, a vice president with investment house Prudential Securities Inc.

For that to happen, there would have to be a confluence of major negatives, Mr. Wachtel argues, such as long-term rates moving through the 7 percent range, and profits not matching expectations and valuations. Such drastic occurrences, for now at least, seem unlikely, he says.

One worry: "A lot of investors have been buying on margin" - that is, using borrowed money - many of them day traders or newcomers to the market, says Peggy Farley, who heads up financial firm Ascent/Meredith Asset Management. If the market were to run into stiff headwinds, many over-leveraged investors could face severe losses.

But Ms. Farley remains bullish, in part because she sees more liquidity entering the market in the first quarter of 2000. One reason: Many firms needed to invest in new computer or telecommunications systems but waited until potential Y2K problems were behind us over the holiday season.

Now that the Y2K threat appears to have largely disappeared, they can open up the capital-spending spigots.

So, assuming the market continues to advance this year, what's an investor to do? In the decade of the 1990s, the place to be was in blue-chip and growth stocks, as well as technology, including the Internet.

Babson sees firms linked to US trade as doing well in 2000. Other strong sectors, he believes, will be consumer durables and the information-technology-telecommunications area.

Investors, of course, can participate in growth stocks, blue-chip companies, and the technology sector by investing in a fund linked to the S&P 500 index. Or they can buy specific growth or tech funds.

But to participate in potential gains in many small-company stocks, or value stocks, they may need to invest in a fund linked to the Wilshire 5000 index, which tracks the entire US stock market.

Mutual-fund analyst Sheldon Jacobs, who publishes the No-Load Fund Investor, a newsletter, believes that these "total market" index funds - that is, funds linked to the Wilshire 5000 - are now "no brainers" because of their solid gains and broad exposure.

Whether beaten-down value funds will make a comeback, of course, remains speculative. Value stocks tend to have low price-to-earnings ratios, and are considered "undervalued."

There is "some evidence" that selected value stocks are rebounding, says Mary Jane Matts, senior portfolio manager with the Armada Equity Income Fund.

For the most part, though, "If you find a value fund doing well, it is probably a growth fund in drag," she says - that is, a value fund that is loading up with growth stocks to juice up returns, as some value funds have done.

Still, Ms. Matts is convinced that the technology parade will eventually come to an end - taking many traditional growth stocks downward with them. That means investors should remember the importance of diversification, and have an exposure both to value and small-cap stocks, as well as technology and growth stocks, she says.

And, some experts would argue, add in a solid international fund as well.

(c) Copyright 2000. The Christian Science Publishing Society

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