a group of funds, and by being patient through thick and thin.”
SIZING UP ’98
You probably couldn’t imagine a more idyllic backdrop for the stock market. The economy is growing, unemployment is low and inflation has fallen to minuscule levels. Corporate profits continue to rise, and interest rates–at their lowest since the late ’60s–are falling, and that’s before Congress hacks away at the federal deficit or approves a budget with a surplus. Put all those factors together, and there seems to be little reason why the stock market couldn’t post another sizable gain in 1998, right?
Not so fast. True, one measure of how well the market will do–the percent corporate earnings or profits are expected to grow–points to a reasonably good year ahead. But the rate that America’s bottom line is increasing has started to tail off. Last year, earnings growth figures for the S&P 500, which rose 11% in 1995 and 14% in 1996, fell back to an estimated 11%. And while some of the more optimistic experts out there think corporate profits should end the year up 8%, a more realistic figure might undercut that a bit, perhaps in the 5%-6% range. “Any corporation out there will tell you they want to do better than the average,” says David M. Blitzer, vice president and chief economist for Standard & Poor’s. “But obviously, there’s going to be a number that fall below the mark.”
A number of culprits are behind the squeeze on profits. Employment is rising, an indication that there should soon be upward pressure on wages. The last few years, a number of companies snipped healthcare costs by enrolling workers in managed care plans. Now that enrollment is nearly complete, that one-time saving is behind us. In fact, there are concerns that companies will soon have to shell out more for their workers’ doctor bills. Something else to keep in mind is the market’s valuation. Currently, the S&P 500 is trading at a price-to earnings (P/E) ratio of 21. Keeping in mind that the index has historically borne a P/E between nine and 22, it seems there’s not much higher to go.
There are some positives to remember,
however. For one, money keeps pouring into the market from retirement plans like 401(k)s, and an increase in demand relative to supply could help propel stock prices up. A strong dollar and concerns about foreign markets will also make the U.S. market look attractive.
So what does all that spell for the year ahead? For one, don’t look for another 30% gain in 1998. A lot of experts look for the market to rise during the year, but only a muted 10% or so at most. As for segments of the stock market, there are several things to consider. First, with uncertainty in Asia and earnings tailing off, large, defensive stocks–the household names that make up the S&P 500- should do well. “When investors big and small get worried about what’s to come, they head for yesterday’s winners, the big large-cap stocks that