The ‘90s May Be Another Good Decade for Investors : Wall Street: Most experts expect a decline in inflation to boost investment returns. But the gains will probably be less than in the profitable 1980s.
Whatever pundits decide to label the 1980s--the Decade of Debt, the Decade of Greed--it was a great decade for investors. Whether they poured their money into stocks, bonds, mutual funds or savings deposits, chances are that they beat the rate of inflation, often by a wide margin.
The 1990s are also expected to be a good decade for investing. But market watchers caution that the opportunities may be more limited and returns more modest. On the other hand, the rate of inflation is also expected to drop, which should help maintain real returns--gains after accounting for inflation--at gratifying levels.
“Right now, it looks like it should be a pretty good decade,” said David Wyss, chief financial economist with Data Resources in New York. “The economy is pretty stable, inflation is moderate, and most other things seem to be moving in the right direction.”
Among the market forces at work are a slowing economy, declining corporate profits, falling interest rates and a steady easing of trade restrictions and tensions between East and West. All of these factors are expected to have an impact on investing in 1990 and beyond.
Because these factors have a diverse effect on a variety of investments, experts are divided on what the best bets will be in the coming year. Some of the predictions:
- A “flight to quality” and expectations for lower interest rates will boost returns on top-rated corporate bonds.
- Housing will continue to be a good investment, but rates of return are expected to decline dramatically in states such as California, where prices rose at double-digit annual rates in recent years.
- Precious metals, which have recorded depressing returns for the past two years, are due for a rebound. But the price gains are expected to be best with gold, which will benefit from the dollar’s decline.
- Rare coins, one of the best investments in 1989, are expected to continue their rise as the industry becomes better at policing its dealers and creating a more predictable market for investors.
- Experts are divided on the direction of the stock market, but they generally believe that well-capitalized growth companies such as Merck and Co. Inc. and Philip Morris Inc. will outperform the market. Moreover, some multinationals, such as International Business Machines Corp., Eastman Kodak Co. and McDonald’s Corp., are expected to benefit from the easing of tensions between East and West. But market watchers still advise investors to buy only on weakness, and they note that perestroika stocks should be bought with an eye toward long-term gains and not quick profits.
The accuracy of these predictions depends, in large part, on the direction of interest rates and the economy.
If interest rates continue to head down, as they seem likely to do at least through early 1990, corporate stocks should benefit. In times of falling interest rates, companies find that their borrowing costs decline, which helps them invest in new technology to make them more competitive in the long run.
Declining interest rates could also help the real estate market, which cooled dramatically in the latter half of 1989 and would make long-term bonds more valuable.
The economy is also set for a slowdown, although probably not a recession, economists said.
“We think the economy is slowing down, but the big issue is whether we will have a recession,” said Philip E. Vincent, vice president and economist at First Interstate Bancorp in Los Angeles. “At this point, we don’t think so. We will just have very slow growth.”
Savings Deposits
Small investors who squirreled away their funds in savings deposits at banks and thrifts enjoyed strong returns in 1989. Rates paid on even short-term certificates of deposit averaged 8.34%, according to Bank Rate Monitor. That’s nearly double the estimated inflation rate for the year.
Although these returns in no way resembled the much richer rewards gained by those putting money in the stock market, savings deposits also carry little, if any, risk.
Then, too, rate-shopping depositors could find much higher returns if they were willing to place deposits in troubled institutions. Some sick thrifts were paying 10% and 11% yields early last year on short-term certificates of deposit.
But the largess of 1989’s savings industry is not likely to be repeated in 1990, according to E. Gareth Plank, analyst at Shearson Lehman Hutton in San Francisco.
The savings and loan bill passed late last year tightened industry rules, making it more difficult for banks and thrifts to grow. Consequently, they will not be as eager to attract deposits, which bodes badly for rate-conscious savers, Plank noted.
Competition is likely to ebb further as troubled banks and S&Ls; get swallowed by their healthier brethren, leaving California with fewer financial institutions.
Bonds
The bond market posted mixed returns as quality issues, such as Treasuries and investment-grade corporate debt, posted hefty gains in price, but high-risk, high-yield junk bonds crashed.
The junk bond market debacle is largely blamed on soaring default rates and worries about the economy. And those worries are expected to persist at least through the early part of 1990. There are contrarians who believe that the market has dropped too far, too fast, and it is due for a recovery. But the risks involved in investing on such beliefs are great.
Meanwhile, the prognosis for Treasuries and high-quality corporate bonds is good, although no one expects them to fare as well as they did in 1989.
Treasuries, boosted by falling interest rates, returned nearly 21% last year when accounting for both the interest payments and gains in market value of these securities, said James Kochan, chief fixed income strategist at Merrill Lynch. Merrill is expecting returns in the 8% range during 1990, he said.
Quality corporates, municipal bonds and mortgage instruments will fare better, he said, and they may, in fact, benefit from the downturn in the junk bond market.
Economists are already seeing a shift to high-quality corporate bonds, and the more money there is in the market, the more likely that bond prices will be bid up, noted John Lonski, senior economist for Moody’s Investors Service.
Stocks
Equity investments recorded a year of dramatic gains in 1989--the Standard & Poor’s index of 500 stocks jumped 31% during the year. But the future direction of the stock market, as always, is sharply debated. There are moderates who expect some appreciation but not as much as in 1989. There are optimists who expect the Dow Jones industrial average to reach unprecedented peaks. And there are those who believe that the market is overvalued and due for a “correction”--market talk for a decline. Some market watchers frankly admit that they’re confused.
“Heck if we know where the market is going,” said R. Earl Hadady, president of Hadady Corp. in Pasadena, which publishes a market newsletter. “We are on the fence at the present time, waiting for market sentiment to tell us which way it’s going. Right now, we’ve got a teeter-totter. It could go either way.”
Al Frank, editor of the Prudent Speculator, a market newsletter in Santa Monica, has no lack of conviction.
“The long-term trend is optimistic,” Frank said. “I would expect that the market will be into the next up cycle in 1990 and could very well be between 3,200 and 3,600 by the end of the year.” Frank admitted that he’s a market optimist. At this time last year, he was predicting that the Dow Jones industrial average would have hit 3,200 by now, he acknowledged.
Norman E. Mains, director of research and chief economist at Bateman Eichler, Hill Richards Inc. in Los Angeles, is a bit more pragmatic.
“I don’t think anybody can reasonably expect a 25% gain in stock prices year after year, and that’s about what we had in 1989,” Mains said. “But I am moderately bullish toward the stock market.”
Meanwhile, Geraldine Weiss, editor of Investment Quality Trends in La Jolla, believes that the market is more likely overvalued than undervalued.
“I advise investors to keep about 50% of their portfolio in cash to take advantage of a buying opportunity in 1990,” Weiss said, explaining that such an “opportunity” will develop after the market declines in the near term.
She still expects the Dow to rise into the 2,900 range--a new high--later in the year, but she says the figure will be deceptive because only a few well-positioned companies will see substantial stock price gains.
“I would look for a two-tier market next year,” she added. “You’ll have the conspicuous stocks going up and the less-than-blue-chips going down.”
Real Estate
After several years of heady growth, the California real estate market slowed substantially in late 1989, and that slowdown is expected to continue into 1990.
Although some people fear that prices for everything from commercial office buildings to single-family homes may slip, many market experts believe that the fears of a free fall in home values are overstated.
These fears have been fed by monthly housing data indicating that the median price of a home in California has been falling over the past few months. Moreover, real estate agents acknowledge that houses are staying on the market substantially longer than they did a year ago.
But economists say the data is somewhat misleading because it tracks the sales prices of homes without regard for where the houses are being purchased. Californians are moving farther out into the suburbs in order to find affordable housing or are making due with smaller homes, said Carolyn Sherwood-Call, an economist at the Federal Reserve Bank of San Francisco.
“Because more people are buying homes in less expensive areas, the overall numbers are falling, although the actual price of any given home is not declining,” she said.
Others are less optimistic. Pointing to California’s worsening infrastructure problems--such as smog, traffic and crime--they expect housing prices to slide. Moreover, they note that the recent weakness in the market could portend a housing slump similar to those seen in Arizona and the Northeast.
Precious Metals
One of the few ways that investors really could have lost during the past two years was to have bought gold, platinum or silver. Each of these metals lost ground in 1989, and gold and silver decreased in value during 1988, too.
Especially after factoring in the effect of inflation, they were all big losers. Silver recorded the biggest drop in value, with its price falling nearly 14% during 1989.
“Silver has really turned out to be the idiot stepbrother of the other precious metals,” complained Bruce Kaplan, president of Kaplan Precious Metals.
Although silver has increasing uses in industry, the producing nations have glutted the market, Kaplan said. That’s helped keep silver prices low. However, the value of platinum also slipped 5% during the year, whereas gold prices fell just under 2%. Gold was only saved by a late summer rally, spurred by fears of a weakening economy, Kaplan added.
The trend may change in 1990, however, Kaplan said.
“I think there are a number of factors that are going to drive gold and its sister metals higher,” Kaplan said. “One is fears about a weakening U.S. economy. We also think demand might be higher as people in the Soviet Bloc are able to buy gold legally,” he said.
Certainly, he said, the metals should outperform the terrible results recorded in 1988 and 1989.
Collectibles
The collectibles markets went wild in the late 1980s, with everything from fine art and investment-grade coins to baseball cards and classic cars soaring in value.
Most impressive was the performance of top investment-grade coins, which reported a staggering 50% leap in value during 1989, according to Coin World Trends index.
The price surge was attributed to a variety of factors, including enforcing higher professional standards among coin dealers, said Scott A. Travers, president of Scott Travers Rare Coin Galleries.
“A few years ago, rare coin investing was a shot in the dark,” he said. “Customers were at the total mercy of the coin dealer, and they had no way to be made whole if the dealer was wrong.”
But now there are professional organizations that police the industry and provide information about prices, Travers said. “Buyers and coin dealers themselves are feeling more comfortable about buying coins,” he added.
For those reasons, Travers and other coin experts are optimistic about the market’s future. Travers expects the best appreciation levels to be for very rare coins, rather than more common denominations, though.
But coins are not the only collectible items that have soared in value in recent years. The price of some rare baseball cards has appreciated so much that old-line collectors have begun complaining about the “yuppies” who have no eye for anything but the investment potential.
And there are no signs of abatement here either. Already, only days after the first 1990 baseball cards were released, collectors noticed errors in some Nolan Ryan and Ryne Sandberg issues that would have sold for $1 to $2 in retail stores. Now collectors are bidding up to $20 apiece for the bloopers.
Meanwhile, car buffs have created a hot after-market for Ferraris, particularly since the death of Enzo Ferrari. A new Ferrari Testarossa, selling at Hollywood Motors for $149,000, was recently listed in the newspaper for sale at $315,000.
Of course, not every collectible appreciates. The value of U.S. stamps, once a healthy collectible market, fell more than 13% in 1989 after appreciating only incrementally in 1988. And few want to speculate about when, if ever, the stamp market will make a comeback.
1989 STOCK PERFORMANCE BY INDUSTRY GROUP
LEADING
Group: % chg.
Oil drilling: +87
Soft drinks: +59
Oilfield equipment and services: +56
Health care providers: +54
Other oil equipment and services: +53
Pipelines: +53
Communications technology: +52
Telephone systems: +50
Life insurance: +49
Medical and biotechnology: +49
LAGGING
Group: % chg.
Computers: -19
Tires and rubber: -14
Computers excluding IBM: -13
Transportation equipment: -10
Land transportation: -10
Auto parts and equipment -9
Auto manufacturers: -8
Other auto parts: -7
Steel: -6
Industrial technology: -5
Source: Dow Jones & Co. via Associated Press
1989 INVESTMENT SCORECARD
How different types of investments fared, ranked by total return in percent.
1989 1988 Rare coins, top investment +50.62** +26.75 grade (Coin World Trends index) Stocks, blue chips (Standard & +31.53* +16.83 Poor’s 500-stock index, dividends reinvested) Gold mutual funds (Lipper +30.42**** -15.68 gold fund index) Stocks, broad market (Wilshire +29.15* +17.94 5000-stock index, dividends reinvested) Art (Sotheby’s art index, +28.33** +41.99 weighted aggregate) Growth mutual funds (Lipper +27.47**** +15.78 growth fund index) International mutual funds +23.59**** +18.10 (Lipper international fund index) Stocks, over-the-counter +21.75 * +17.69 (Wilshire OTC index, dividends reinvested) Growth and income mutual +21.63**** +19.47 funds (Lipper growth and income fund index) Long-term Treasury bonds +20.94* +9.20 (Merrill Lynch long-term Treasury index Long-term investment-grade corporate bonds (Merrill Lynch +16.03* +11.32 long-term corporate index) Mortgage securities (Merrill +15.56* +9.15 Lynch mortgage pass-through securities index) Municipal bonds (Merrill +13.44* +9.98 Lynch long-term municipal bond index) Intermediate-term Treasury +13.27* +6.33 securities (Merrill Lynch intermediate-term Treasury index) Money-market funds +8.88* +7.11 (Donoghue’s 12-month yield on taxable money funds) One-year certificates of +8.67*** +7.66 deposit (Bank Rate Monitor national index) Five-year certificates of +8.57*** +8.35 deposit (Bank Rate Monitor national index) Money market deposit +6.46*** +5.86 accounts (Bank Rate Monitor national index) Residential real estate +5.30* +5.80 (rise in average weighted price of new and existing single-family homes, National Assn. of Realtors estimate) Junk bonds (Merrill Lynch +4.75* +13.47 high-yield bond index) Inflation (Dec.-to-Dec. change +4.4* +4.4 in consumer price index, Data Resources estimate) Gold (Comex spot contract) -1.95 -15.67 Platinum (New York Merc -5.15 +3.20 spot contract) Stamps (Linn’s U.S. stamp -13.6** +0.48 market index) Silver (Comex spot conract) -13.91 -9.58
* estimate
** through Nov. 30
*** through Dec. 27
**** through Dec. 28
