Stuck behind the sluggish

Investors look for open road after months of inching along

For investors, the road to financial gains in the year 2000 has turned out to be strewn with speed bumps. Among the impediments: the sinking euro, which has trimmed profits for US global corporations; rising energy costs; and belt-tightening by the Federal Reserve, which has led to higher interest rates.

Add two potholes to the mix: less-than-robust corporate earnings, which dampen enthusiasm about stock-investing in general, and the uncertainty resulting from the tightness of the US presidential race.

One new concern on Wall Street: that either party may sweep both the White House and congressional races, wiping out the firewall that has separated the lawmaking and executive branches of the federal government since the 1990s. Republicans have controlled Congress in recent years, while the Democrats have held the White House.

"Wall Street likes divided government because that means not all that much happens. But Wall Street dislikes one-party dominance, because that means that a lot of new legislation gets through, and that makes the business community very nervous," says Larry Wachtel, an analyst with Prudential Securities Inc., in New York.

The year 2000 wasn't supposed to turn out this way, of course, knotted up in economic and political questions: Historically, presidential-election years are upbeat periods for the stock market.

"So far, this is the worst election-year stock market since 1960," which also involved a very close presidential race, between John F. Kennedy and Richard Nixon, says Joseph Tigue, managing editor of "The Outlook," a financial review published by Standard & Poor's Corp.

Last week, Standard & Poor's lowered its recommended stock allocation to 60 percent of a model portfolio from 65 percent, and boosted its bond allocation from 20 percent to 25 percent.

"We're looking for the S&P 500 index to be up only about 2 percent this year, and the Nasdaq Composite Index to be up about 3 percent," says Mr. Tigue.

Some analysts still expect the election cycle to kick in during the next month, propelling stocks higher. Tigue, for example, personally believes that the rest of the year should produce solid gains for investors.

"I fully expect that we'll see some election euphoria coming into play and affecting the market in a positive way. And not only is the election cycle at work here, but historically, the fourth quarter, between October and December, is the strongest for the year. So we should have some good returns in the period ahead," says Robert Dickey, chief market technician for investment house Dain Rauscher, Minneapolis.

"We just have to get through the next few weeks," says Prudential market technician Ralph Acampora. "Around the election, the honeymoon should kick in for the market," he says. (Interview, page 15.)

The average mutual-fund investor, who had to eke out money-market type gains in the third quarter (if even that), may not be holding his breath, however.

For the third quarter, the mood on Wall Street was definitely pessimistic - and down, led by a floundering Nasdaq Composite Index. The technology-oriented Nasdaq took a decisive hit, falling some 7 percent during the quarter. For all of the year 2000, it is down about 12 percent, which qualifies as a "correction."

Both the blue-chip Dow Jones Industrial Average and the large-cap Standard & Poor's 500 Index also registered less-than-stellar returns, with the Dow earning just under 2 percent for the quarter and the S&P down about 1 percent. For the year, the Dow, is down about 7 percent, the S&P is off a little over 2 percent.

For investors, selectivity was the key to success in the third quarter. "We're now seeing more of a rotation than a correction," argues Mr. Dickey.

"That means that to be in the market you've got to be very nimble. You have to recognize where change is occurring and then act on that change," he says.

"This [past] quarter provided a stark lesson as to how the market can suddenly rotate," says Russel Kinnel, who heads up equity analysis for information firm Morningstar Inc., in Chicago. "It was a great bag of things. Some value sectors gained, but so, too, did some growth sectors." Most important, the quarter took some of the thrust off the speculation of the past year or so in tech stocks, he says.

Financial and biotechnology/healthcare stocks led the way the past three months. (See related stories, page 16.)

By contrast, large-cap stocks and technology stocks headed to the cellar. Anything with the word "international" in it also hit the skids, reflecting economic turmoil in Europe and Asia.

Latin America did better for the year as a whole, helped by the election of a new reform government in Mexico. Among world equity funds, only Canada's posted positive numbers for the quarter.

Many value issues did well. But growth stocks, except for the super-charged healthcare/biotechnology area, were flat or down.

"I've never seen such madness, such hysteria as the rush to invest in technology stocks during the past year or so," says Neil Eigen, a managing director of investment house J.&W. Seligman, New York.

A number of folks would frequently tell Mr. Eigen that in the age of technology, value investing was kaput!

Look who has the last laugh. Eigen heads up two value funds for Seligman that turned in solid performance this past quarter. His large-cap value fund was up over 17 percent for the quarter; his small-cap value fund up over 15 percent. While much of his gains came from financial stocks, he sees future potential in such sectors as paper and forest products, chemical stocks, and "any old-line industries that have not participated in market gains this past year."

While the consensus view among market analysts favors continued selective market gains - and US national economic growth - in the months ahead, not all analysts are sanguine.

James Stack, who publishes InvesTech, a respected market-review published in Whitefish, Mont., believes that warning flags are now flying, suggesting the US economy may be heading into a recession. One indicator: Many of the best-performing stocks of the past few years (the so-called "momentum" stocks) are now hitting new 12-month lows.

The list includes Microsoft, Lucent, Dell, AT&T, MCI Worldcom, and Ford. And Wal-Mart and AOL are not far behind, says Mr. Stack.

Bottom line, he says: Be somewhat defensive going into the year 2001.

(c) Copyright 2000. The Christian Science Publishing Society

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