Forecast '99 - financial analysis

Black Enterprise, Jan, 1999 by Donald Jay Korn

What are the best financial move to make this year? Here's a look at key investments to build wealth while buffering market bumps.

GOLDILOCKS FINALLY choked on her porridge. For years, the U.S. has enjoyed a "not too hot, not too cold" economy, which sent the stock market through the roof. The Standard & Poor's 500 Index, which historically has gained about 10% per year, returned 37.53% in 1995, 22.95% in 1996 and 33.35% in 1997, the best three-year streak on record. The boom continued well into 1998 and Goldilocks seemed to be sitting pretty.

Then foreign troubles threatened to infect the U.S. and our long bull market took a strong bearish turn. In the third quarter of 1998, the S&P 500 lost 9.93%, dropping the nine-month return to a paltry 4.51%. Smaller stocks suffered even more. Although things seemed to settle down in the fourth quarter, by no means are Wall Street's titans certain that the worst is over.

After a volatile '98, what could be in store for 1999? Hard times, perhaps, in the domestic and worldwide economies. But investors won't necessarily get sick just because the economy sneezes. A roundup of financial professionals consulted by BLACK ENTERPRISE formed the consensus that you should continue stocking up your portfolio, looking beyond the tunnel to the light on the other side.

Here's the rundown:

Economy. "I'm expecting a global recession in 1999," says Percy Bolton, an investment management consultant and certified financial planner in Los Angeles who has been recognized by Worth magazine as one of America's best financial advisors. "Problems in Russia, Asia, and Latin America likely will spill over to the U.S. and Europe. More hedge fund problems may emerge, making lenders cautious, and that could lead to a credit crunch here."

Richard Peace, a certified financial planner with Advantage Capital in Colorado Springs, Colorado, doesn't expect a recession, but he does see a slowing economy. "External problems around the world will be felt here," he says. "It's all interconnected." As Gayle P. McEvilley, a financial planner with Rinehart & Associates in Charlotte, North Carolina, puts it, "When foreigners stop buying our products, U.S. companies stop manufacturing. Already, you can read in newspapers about layoffs and cutbacks."

Inflation and interest rates. A slowing economy will make it easier for the Federal Reserve to fight inflation. Low inflation, in turn, means low interest rates. "Interest rates probably will stay flat or decline," says stock broker David Fields of Woburn, Massachusetts, who's affiliated with National Securities Corp. in Seattle. So don't expect to see plump yields from bank accounts or money market funds any time in the near future.

Femi Shote, a financial planner with the New England Financial Group in Waltham, Massachusetts, advises investors to keep an eye on Alan Greenspan, chairman of the Federal Reserve Bank. "The Fed is the most powerful institution in the world, and it's indicating it wants to lower interest rates to stimulate the economy. That means 1999 will be a great opportunity to make money, so why fight the Fed?"

Equity market outlook. A year ago, says Shote, it was hard to find good value in the stock market. Now, with prices down, the best companies in the world are on sale. "There's no reason to buy the second best," he says. "Take the easy path and buy great companies whose prices have fallen. The same is true for mutual funds: some funds with outstanding long-term records are down by as much as 25%. Buy them today, while they're cheap."

Cheryl Creuzot, an attorney and certified financial planner who is president of Financial Strategies Group in Houston, agrees that now is probably the time to buy stocks. "The domestic economy remains strong so there's no reason for panic, especially if you're investing for the long term. Investors who went into stocks after the 1987 crash have done very well." Indeed, every sharp market drop in recent years has been followed by a gradual rebound (see chart, "Riding the Bull After a Bear Run").

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However, don't expect a reprise of the 1995-97 bonanza. "I expect stock market returns to move down to their historical average," says Peace. "Stocks may return 10%-14% in 1999, rather that the 20%-30% returns we've been seeing. There's some value out there now, after the recent decline, but extraordinary returns shouldn't be anticipated."

Robert M. Cotton, vice president of investments with Prudential Securities in Chicago, is also positive about the stock market this year. "Unlike secured bonds or tangible assets, which have a tendency to outperform during periods when our economy experiences extreme recession or inflation, common stocks have a tendency to outperform during periods of economic normalcy. As I see it, investors should focus on sectors that have been sold off unreasonably hard. Oil services, financial services, real estate investment trusts (REITs), biotechnology, capital goods and some technology issues are among such sectors."