The bull market is far from over.
That was the sentiment of investors at this year's Pensions & Investments' investment management roundtable.
Alan Bond, chief investment officer of New York-based Bluestone Capital LLC (formerly Bond, Procope Capital Management), a returning panelist whose stock market predictions for 1998 have proven to be correct, expects returns of 15% to 25% for 1999.
"It's almost like when you look at our economy maybe we have learned how to do it and to do it right and that's why we've been able to stay at this cruise altitude," he said.
James Paulsen, chief investment officer for Norwest Investment Management, Minneapolis, foresees 15% to 20% stock market returns for the next year.
Others were not as optimistic, but were bullish nonetheless, forecasting between 5% and 10% U.S. equity returns for next year.
"As for next year, I believe 75% of the investment managers will outperform the index, and that something north of 10% will make you very, very competitive," said Eugene Sit, chief investment officer of Sit Investment Associates, Minneapolis.
Other panelists were Loren Hansen, chief investment officer, Stein Roe & Farnham Inc., Chicago; and Louis Holland, chief investment officer of Holland Capital Management, Chicago.
The main worry this year was volatility, which most on the panel hope will subside in 1999.
Volatility might ultimately hamper the bull market, said Mr. Hansen.
Reasons for the volatility include technology that increases dissemination of information, deflation, momentum investing, hedge fund liquidation and "buy-on-the-dip" mentality, panelists said.
"I think it's like a two-edged sword sentiment that either it's really going to be a bull run or we're going to melt the whole thing down, and that's what's reflected in that volatility," Mr. Paulsen said.
Panelists agreed the volatility on a long-term basis it is not far off from historical levels, but the intraday volatility can be frightening.
"I view that six-week to eight-week period (in late summer) as much scarier than my memory of 1987," Mr. Hansen said.
Most of the blame for the volatility should lie with money managers, panelists said.
Mr. Paulsen said, "I think the buy-on-the-dip mentality has been so rewarded for so long that it has forced all managers of any ilk, they can't help themselves, to want to trade a little on this because you can almost see it coming."
In addition to volatility, corporate earnings are expected to continue to be a driver in the equity market. Panelists were split, with some predicting moderate 5% to 8% growth and some anticipating flat to slightly positive earnings growth for the next year.
"I think that earnings are going to be hard to come by, so as it relates to the overall stock market with multiples of about 25 times we're talking about, 25 times next year's earnings, '99's earnings now, and looking at a base of 14 in historical average multiples," said Mr. Holland. He foresees flat to 1% growth in earnings.
Mr. Paulsen agreed, citing deflation as driving earnings, because cost cutting will continue to lower overall cost structure as prices continue to fall.
Mr. Sit sees the current economy as one in disinflation rather than deflation. While Asia has experienced deflation (declining prices and declining asset value), America and Europe have had disinflation (a lack of or absence of inflation). Slower rises in prices have contributed to the increase in financial asset prices, which in turn have helped the economy, he said.
"You have got to look at various sectors and there may be cyclical problems rather than secular problems in terms of earnings," Mr. Sit added later.
Attractive sectors are financial stocks, pharmaceutical stocks, retail stocks and the defense industry, panelists suggested.
Merger and acquisition activity also will need to be watched, while foreign companies are not just buying U.S. stock, but also buying U.S. companies, Mr. Bond said.
"I'm not convinced that the corporate cultures that have taken 100 years to evolve are going to be easily assimilated on a global basis," he added.
The other wild cards will be Y2K and what was characterized by some on the panel as a stock-pickers market.
The Y2K watch may begin with the conversion to the euro. Because many in Europe already are preparing for the new currency, they also have decided to fix the so-called year 2000 bug, Messrs. Paulsen and Hansen said. If the euro conversion is smooth, Y2K also should be OK, both concurred.
Mr. Bond disagreed. He believes Europeans are more concerned about two different prices for goods and services than about Y2K.
Mr. Hansen's main worry is the prediction of slowing M&A activity next year because of the Y2K problem.
"And if you think that (M&A activity) is what's been driving this market in here, if that were to occur, I think that would negatively impact the broad market," Mr. Hansen said. "So, again, I'm not predicting that, but I can see where that might happen."
In looking at large-cap stocks vs. small-cap, most panelists expect the dominance of large-cap to continue.
Mr. Paulsen cited the correlation between the rate of inflation and relative performance of large- and small-cap stocks. He concludes that it might be that small-cap traditionally has outperformed over time because investors have been looking at periods when inflation has always been on the rise.
Mr. Bond expects more appreciation in the small-cap to midcap market in the first six to nine months of 1999.
In the bond market, the panel's outlook for the next year is not as positive.
Mr. Holland thinks the secular bull market for bonds is over and sector selection, rather than duration, will come into play. He also indicated municipal and high-yield bonds look more attractive at this point.
Mr. Sit thinks the bond market, overall, will be fine, although he said current spreads are too wide.
