Newspaper article St Louis Post-Dispatch (MO)

A Scenario for a Collapsing Market in the New Year

Newspaper article St Louis Post-Dispatch (MO)

A Scenario for a Collapsing Market in the New Year

Article excerpt

If you are a long-suffering investor in the stock market, you are probably hoping that 1995 will be a better year. But just because you've paid your dues with losses over the last 12 months doesn't mean the New Year will bring any long-term relief.

In fact, 1995 could be the worst year for the stock market in a long time. On the other hand, the bond market could turn out to be the place to be for investors.

"I just don't think there is an upside in this market," said Michael Metz, chief market strategist for Oppenheimer & Co. "I just don't see the scenario where it goes up."

In fact, Metz and other market gurus see a strong case for the market to go down. Metz, in fact, believes the bottom for the Dow Jones industrial average could be in the 3,000 to 3,200 range. That would be more than a 20 percent drop in value from recent levels and would certainly put a fear into small investors.

And that's where the biggest problem lies.

Stock prices slipped so quietly in 1994 that most small investors hardly noticed. While the Dow ended the year not far off its highest level, the bulk of the market suffered what one firm called a "stealth bear market."

"Investors who were unfortunate enough to own the wrong stocks this year have experienced severe capital depreciation," said Bradlee Perry, a senior partner at David I. Babson & Co., a Cambridge, Mass. investment company. The typical stock on the New York Stock Exchange declined 22 percent from its high point last year, he estimated.

At some point small investors will discover their declines and will either stay put, or more likely, decide to cut their losses by putting money back into bank accounts and money market instruments that are now paying more attractive interest rates.

If this is the year that investors bail out of the market en masse, the prediction of a drop to 3,000 might be optimistic.

The stock market has been strong the last few weeks, with the Dow experiencing a healthy year-end rally. It was, the experts say, a textbook rally caused by large investors like mutual funds that were trying to boost the price of the shares they hold before reporting their annual performance to customers.

Yale Hirsch, a market historian, says the Dow has risen an average of 1.74 percent during the last five trading days of the year since the early 1950s. The gain this year exceeded that amount.

The trouble is that while technical rallies like that may con some investors into thinking they are doing better, they are normally not sustainable.

Experts suspect that the trigger for declining stock prices in 1995 will be lower-than-expected corporate profits. It isn't that profits will be bad, but Wall Street is expecting a 16 percent improvement on top of healthy '94 gains.

Because of rising borrowing costs, companies probably are going to fall short of those goals. And when they do, their stock prices are bound to suffer.

But the same dynamics that could hurt stocks should prove beneficial to the bond market.

The Federal Reserve's decision in December not to raise interest rates again was due partly to the belief that the economy may be slowing enough with the half-dozen hikes already made last year. …

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