1990 1991 : Regardless of How You Invest, Watch Your Step : Some Experts Are Predicting a Midyear Bull Market, but Don’t Count On It

When you total up your investment gains and losses for 1990, the surprise may be that you didn’t fare nearly as bad as you expected.

But a year from now, the opposite may be true: Many antsy investors who expect to make big money in stocks, bonds and other financial investments in 1991 may be sorely disappointed. The ‘90s are shaping up to be a decade for patient, conservative investors, and it’s going to take more than one year’s experience to drive that lesson home.

Countless market experts now are staking their careers on two 1991 forecasts: that a new stock bull market will rip out of the pen by midyear and that interest rates will continue to slide, boosting bond returns.

Looks pretty simple, all right, and even logical. But there are lots of things that can, and probably will, go wrong, including the Mideast situation. That doesn’t mean you won’t make money in 1991--maybe even double-digit returns overall. But you will have to invest more thoughtfully and conservatively than at any time since the 1970s.

Here’s a look at how key markets fared in 1990 and some strategies for the new year:

* U.S. STOCKS: Last year was the first down year for stocks since 1981, measuring total return (stock price change plus dividends). But while Standard & Poor’s 500-stock index is off 10.5% from its July peak, for the year it lost just 3.4%, using total return.

Likewise, the total return of the average stock mutual fund was a loss of about 7% for the year, says Lipper Analytical Services. That’s disappointing, but hardly disastrous.

The averages mask the specifics, of course. And the clear theme that emerged in 1990 was that we’ve returned to a stock-picker’s market. That won’t change in 1991, experts say. Pick your stocks well, and you’ll do fine. Pick badly, and you’ll get crushed. Even a new bull market tide may not lift all boats, as in the 1980s.

Picking well this year means staying with companies that are market leaders, says Jeff Shames, chief equity officer at Massachusetts Financial Services in Boston. “A major trend will be the No. 1 and No. 2 companies in a market driving a wedge between themselves and the No. 3 and No. 4 companies,” he says, because the smaller players may have much more trouble getting financing to grow.

For stocks, much obviously depends on how quickly the economy’s slide stops. Most experts still see a mild recession. But the majority frequently guesses wrong.

“I think the economy is much worse than people think,” says Richard Carney, whose Los Angeles money management firm, Cramblit & Carney, has just 40% of its assets in stocks now.

The market has rebounded since interest rates began to plunge in October, notes Eric Miller, strategist at brokerage Donaldson, Lufkin & Jenrette in New York. Investors are betting that the drop in rates will jump-start the economy. But if that doesn’t happen in the first quarter, Miller warns, stocks could turn scary again in a hurry--and the next bull market could be a lot longer in coming.

Where’s the market bottom? Many analysts see a low of 2,000 to 2,200 on the Dow Jones industrial index this year, a 16% to 24% drop from the 1990 close of 2,633.66. A Mideast war could make things much worse. But rather than trying to pick a Dow bottom or the economy’s turn, some advisers say the intelligent strategy is to pull a stock-shopping list together, and invest methodically in those targets--companies that will thrive long-term, no matter what happens short-term.

Robert Bacarella, head of Monetta Financial in Wheaton, Ill., expects bargain prices ahead for such stocks as restaurateur Sbarro ($32-Amex), grain processor Archer-Daniels-Midland ($22.75-NYSE) and footwear firm Nike ($40.25-NYSE). He’s building cash now, because “I want to buy my stocks when they get clocked.”

* FOREIGN STOCKS: Overseas markets performed far worse, on average, than U.S. stocks in 1990. London lost 11.5%, Frankfurt 22% and Tokyo 39% in local currencies. But then, many foreign markets far outpaced the U.S. market for most of the 1980s.

This year, foreign markets may again struggle as the world economy falters, says David Testa, chairman of T. Rowe Price Associates’ international mutual funds in Baltimore. Yet even if key foreign economies slow, their stock markets may still do better than the U.S. market, “because we’re going to have even slower growth here,” Testa figures.

The U.S. economy remains an engine of growth for the world, but many countries in Europe and Asia now depend on regional trade--rather than trade with the U.S.--much more than they did 10 years ago, Testa notes. That should boost the odds of making money overseas in the 1990s.

Still, the best reason to begin (or continue) investing overseas isn’t for a 1991 return but for the long haul. “We basically feel the world is on an irreversible course toward globalization” of goods and services, says David Graham, research chief at Palley-Needelman Asset Management in Newport Beach. His $750-million firm keeps 20% to 25% of its stock portfolio in foreign issues such as British conglomerate BAT Industries, Swiss food giant Nestle and Dutch consumer goods firm Unilever.

* BONDS: Investors who stayed put in bonds for all of 1990 earned respectable returns, especially considering that interest rates still are higher now than they were a year ago. Though rates have fallen in recent months--making older bonds more valuable--the current yield of 8.24% on 30-year Treasury bonds still is above the 7.97% yield at the end of 1989.

If you invested in high-quality corporate bonds in 1990, your total return was about 7.2% for the year, using Merrill Lynch bond indexes. In Treasury bonds of one- to 10-year maturities, your total return was about 9.5%. Inflation was an estimated 6.2%, so you beat it. Only junk bond investors suffered losses.

Now what? Conventional wisdom says interest rates should continue to slide with the sinking economy. But some experts say the surprise of 1991 will be that severe financial strains on the economy will mean higher interest rates rather than lower.

Peter Eliades, editor of Stockmarket Cycles newsletter in Los Angeles, sees many more corporate financial disasters in 1991 as the debt cycle of the 1980s unwinds. It will take piles of money to fix the system, he says--and thus, demand for money will rise, while crippled banks stay stingy. That continuing credit crunch will keep interest rates up, he predicts.

What’s more, Eliades looks at the bond-bull majority expecting lower rates and says: “There’s just no way that this many people are going to be right on bonds.”

Frederick Ruopp, head of money manager Chelsea Management in L.A., isn’t quite as pessimistic as Eliades. Ruopp sees interest rates continuing to slip for another three to four months as the Federal Reserve tries to stoke the economy. But by midyear, Ruopp too believes rates will be rising again.

For the year, Ruopp expects bond investors to end up with close to the same returns that they earned in 1990--about 8.5%. So if you just need the interest income, bonds may be an OK place to be. Ruopp advises staying in short-term bonds (three- to four-year terms) of high quality, meaning Treasuries or top-rated corporates.

But if you’re trying to trade bonds for quick gains, be careful--the game may be up within a few months.

* CASH/BANK CDs: If you just kept your money in a one-year bank CD in 1990, you probably earned around 8%. In a money market mutual fund for the year, you earned about 7.8%. So you beat stocks and maybe even bonds. And you stayed ahead of inflation.

Now, short-term interest rates are falling. The average money-market fund yield is down to 7.2%. So “cash” investments don’t look nearly so appealing. Even so, it’s quite possible that cash will end up the best investment of 1991, just as in 1990, because so much could go wrong for stocks and bonds.

Over the long term, however, you’re almost never going to earn from cash what you could earn from stocks or bonds, experts note. That’s a basic rule of capitalism.

So the best advice for cash-heavy investors is: Keep building that hoard if you aren’t yet comfortable investing. But start making a list of long-term places for a good chunk of that money, and begin investing as soon as your comfort level starts to rise.

* GOLD/SILVER: In 1990, gold fell 2.1% and silver plunged 19.6%. And that in a year that saw a sharp rise in inflation, the metals’ alleged best friend.

The bottom line on gold and silver is that they are what they’ve always been, experts say: A hedge against disaster. It’s OK to own a little in case the doomsayers are right. Beyond that, forget ‘em.

1990 INVESTMENT SCORECARD How different types of investments fared in 1990. For financial investments such as stocks and bonds, total returns are listed (price change plus interest or dividends earned). For hard assets, returns are price changes only.

1990 1989 Bonds, mortgage-backed issues +10.8% +15.6% Bonds, intermediate-term Treasuries (1 to 10 years) +9.5% +13.3% CDs, five-year (Bank Rate Monitor avg.) +8.0% +8.1% Bonds, municipal tax-exempt issues (long term) +7.9% +13.4% Money market funds (Donoghue’s 12-month avg.) +7.8% +8.9% CDs, one-year (Bank Rate Monitor avg.) +7.8% +8.0% Bonds, high-quality corporate issues (10 years + up) +7.2% +16.0% Bonds, long-term Treasuries (10 years + up) +6.5% +20.9% Inflation, consumer price index +6.2%* +4.6% Money mkt. bank accts. (Bank Rate Monitor avg.) +6.0% +6.3% Gold, Comex near-term futures -2.1% -1.8% Stocks, blue chips (S&P; 500, with dividends) -3.4%* +32.3% Stocks, science and technology mutual funds -3.7% +22.1% Stamps (Linn’s stamp market index) -3.9% -13.5% Bonds, junk corporate issues -4.4% +4.8% U.S. dollar, Morgan Guaranty weighted index -6.1% +2.3% Stocks, small-company growth mutual funds -10.9% +23.0% Stocks, international mutual funds -12.9% +22.3% Platinum, NYMEX near-term futures -16.1% -5.7% Silver, Comex near-term futures -19.6% -13.7% Rare coins, top- grade (Coin World Trends) -20.6% +50.6% Stocks, gold-oriented mutual funds -25.2% +22.5%

* estimate

All mutual fund figures from Lipper Analytical, through Dec. 27

All bond statistics based on indexes from Merrill Lynch & Co.