Stocks and bonds in 1991 paid off like a Las Vegas slot machine gone haywire, producing double-digit returns that embarrassed most other investments.
But financial markets tend to adjust themselves faster than most casino managers can pull the plug on errant slots. In 1992, investors will have to lower their sights a lot, most Wall Street experts say.
With stocks in particular, "don't expect the kinds of returns that you had in 1991," warns Bob Chesek, money manager at the Phoenix Group of mutual funds in Hartford, Conn.
Nonetheless, many analysts see an excellent chance that stocks and bonds will continue to beat money-market ("cash") instruments, gold and other rival investments. Here's a look at 1991 returns in key investment sectors and what to expect in 1992:
* STOCKS: It was tough not to make money in stocks last year, if you were in the market for the entire year and were diversified. The benchmark measure of blue chip stocks, the Standard & Poor's 500 index, posted a total return of about 29.7% for the year, including a dividend yield of about 3.4%.
The real action was in smaller stocks, however. The average stock mutual fund that targets smaller companies surged an estimated 49.9%; growth-stock funds, which also own many smaller issues, rose an estimated 35.4%.
Perspective is important in viewing those figures, however: The average small-stock fund had fallen almost 10% in the 1990 bear market. So part of the 1991 gain was just making up lost ground.
Even so, there's no denying the spectacular nature of last year's gains, which were fueled by hopes for a still-uncertain economic recovery and by plunging short-term interest rates.
The problem now may be that stocks have simply run up too far, too fast, some analysts argue. The average S&P; 500 stock closed at an all-time high on Dec. 31, and is priced at 21 times its estimated 1991 earnings per share, and 16 times the earnings estimated by Wall Street analysts for 1992.
Those price-to-earnings figures are near the high end of their historical scale. That doesn't mean stocks can't rise further. But the numbers suggest that there is little room for error: If a recovery doesn't arrive, and corporate profits don't rebound (they've been falling for more than two years), stocks are vulnerable.
At best, veteran money managers see a stock market return in 1992 that is much closer to historical averages: 7% to 10% a year. But that may still beat most of the alternatives.
* BONDS: Bond investors have a three-year winning streak going and a good shot at continuing that streak in 1992, experts say.
High-yield corporate junk bonds performed best in 1991, scoring a total return of nearly 35%. The bonds had slumped in 1990 on recession worries.
Meanwhile, investors earned double-digit returns last year in most bond categories, from Treasuries to high-quality corporate issues to tax-exempt municipals.
Besides interest earnings of 6% to 9% on most bonds, investors earned a bonus: Their bonds appreciated in value as market interest rates fell. The yield on 30-year Treasury bonds finished the year at 7.39%, down from 8.24% one year ago.
For 1992, many bond experts see somewhat lower total returns. You'll still take home your interest, but the sharp appreciation in bond values is probably over unless market interest rates fall much more dramatically.
Bud Hoops, who manages the bond portion of the $335-million Twentieth Century Balanced mutual fund in Kansas City, Mo., has an outlook typical of many bond pros. He sees the potential for long-term interest rates to decline a bit more early in the year, but believes that by midyear rates could be ticking higher with the threat of a strengthening economy.
For bond investors who bought into the market last year, the best advice may be just to stay put and enjoy your high yields, Hoops says. For new investors, the sharp decline in yields already means "it's getting long in the game" to over-commit yourself to bonds maturing 10 to 30 years away.
If you want to lock in yields today, you're better off staying with shorter-term bonds, such as seven-year Treasury notes that pay around 6%, Hoops says.
For bigger risk-takers, bond manager William H. Gross at Pacific Investment Management in Newport Beach suggests looking to mutual funds that own foreign bonds, which typically pay higher yields than U.S. bonds. In particular, "European bonds today represent more value than any bond market since that of the United States in 1981," Gross says.
* CASH: If you kept your money in bank certificates of deposit or money market funds last year, the best you can say is that you beat inflation. Barely.
The Federal Reserve's campaign to slash short-term interest rates--an attempt to jump-start the economy--has left three-month Treasury bills yielding less than 4% today, down from 6.5% a year ago.
In 1991, the average money market mutual fund yielded 5.7%. In 1992, prospects aren't much better. The Fed is expected to keep short-term rates low for most of the year, even after the economy begins to rebound (assuming it does). Even if rates rise later in the year, the total return on cash investments for 1992 is likely to be dismal again.
William Sullivan, economist at Dean Witter Reynolds in New York, says the economy probably will grow slowly at best in 1992 no matter what the Fed or Congress try to engineer. Slow growth means slow demand for money, and that will keep short-term interest rates down, he says.
"I think it will be 1993 before you have an avenue for substantial increases in short-term interest rates," he says.
* GOLD AND SILVER: The price of gold fell 1.8% in 1989, 2.1% in 1990 and 10.2% in 1991, to end the year at $354.10 an ounce. That's a sorry record by any stretch of the imagination. Silver and platinum have fared even worse.
Investors bet on gold when they bet on inflation resurging. Unfortunately for the gold bugs, all arguments for higher inflation have failed to hold water.
In 1992, chances of a bad inflation surprise are even lower because inflation typically declines in the first full year of an economic recovery, as companies hold the line on prices to encourage sales.
What's more, the traditional flight to gold in times of world turmoil also has waned in recent years. It seems that everyone who wanted gold as "risk insurance" bought in the 1980s, and they don't see a good reason to buy more.
The bottom line: Gold used to be an insurance policy, but now it's little more than another speculative investment.
1991 Investment Score Card
One of the best ways to judge investments is against one another. This chart compares estimated returns on a variety of stock, bond, certificate of deposit and commodity investments in 1991, and shows prior years as well, for perspective. It also shows which investments beat inflation last year and which didn't. The figures here are "total returns" for financial investments, meaning price change plus interest or dividends. For commodities, returns are price changes only.
Investment 1991 1990 1989 Stocks, small-company growth mutual funds +49.9% -9.9% +23.0% Stocks, science & technology mutual funds +43.6% -3.1% +22.1% Stocks, growth mutual funds +35.4% -5.5% +25.4% Bonds, junk corporate issues +34.6% -4.4% +4.8% Stocks, blue chips (S&P; 500, with dividends) +29.7%* -3.1% +32.3% Bonds, high-quality corporate issues (10 years+) +19.6% +7.4% +16.0% Bonds, long-term Treasuries (10 years+) +18.4% +6.5% +20.9% Bonds, intermediate-term Treasuries (1 to 10 years) +17.5% +8.3% +13.3% Bonds, mortgage-backed issues +15.8% +10.8% +15.6% Bonds, municipal tax-exempt issues (10 years+) +13.4% +6.9% +13.4% Stocks, international mutual funds +11.5% -12.0% +22.3% CDs, five-year (Bank Rate Monitor average) +7.7% +8.0% +8.1% CDs, one-year (Bank Rate Monitor average) +7.4% +7.8% +8.0% Money market mutual funds, (IBC/Donoghue's 12-month avg.) +5.7% +7.8% +8.9% Money mkt. bank accts., (Bank Rate monitor avg.) +5.3% +6.2% +6.3% INFLATION, CONSUMER PRICE INDEX +4.2%* +6.1% +4.6% Rare coins, top-grade (Coin World Trends) +1.2% -20.6% +50.6% U.S. dollar, Morgan Guaranty weighted index -0.8% -6.1% +2.3% Stocks, gold-oriented mutual funds -7.2% -22.1% +22.5% Silver, Comex near-term futures -7.4% -19.6% -13.7% Gold, Comex near-term futures -10.2% -2.1% -1.8% Platinum, N.Y. Merc near-term futures -17.1% -16.1% -5.7%
Mutual fund figures are estimated based on preliminary results from Lipper Analytical.
All bond statistics based on indexes from Merrill Lynch & Co.