Wall Street clawed its way to a third straight winning year in 1993, overcoming early doubts about the economy, later fears of higher interest rates and a growing diversion of U.S. investors’ cash to red-hot foreign markets. The Dow Jones industrial average jumped 13.7% for the year and closed just under its all-time high. The Dow began the year at 3,301.11 and ended at 3,754.09, for a 452.98-point gain.
The blue-chip index hit a record 3,794.33 on Wednesday but slid a total of 40.24 points in the last two trading sessions, undermined by fresh bond market jitters.
Still, analysts said the market’s performance was impressive. While many experts had been expecting a broad market pullback of at least 10% during 1993, it never came.
“The things that fooled everyone were the mood, the money flow and the momentum,” said Alan Ackerman, investment strategist at Reich & Co. in New York.
Investors’ mood improved as the year wore on and the economy finally built a head of steam. At the same time, interest rates remained near 20- to 30-year lows for much of the year, encouraging investors to draw record sums out of bank CDs and other short-term accounts and funnel the money into stock and bond mutual funds.
Those trends fed on themselves, Ackerman said, giving stock prices the momentum needed to overcome numerous potentially crippling worries--from Russia’s right-wingers to rising gold and commodity prices to the expectation that the Federal Reserve will eventually be forced to push interest rates higher.
For a third consecutive year, small-company stocks were the U.S. market’s stars. The Russell 2,000 index, the purest benchmark of small-stock performance, rose 17% for the year, bolstered by a rally this past week.
The Nasdaq Stock Market’s composite index, which is mostly made up of smaller stocks, gained 14.8% in price in 1993.
Wall Street has been touting smaller companies as being better able to cope with the rapidly changing economy. Investors appear to believe the story--and that small companies’ earnings growth will continue to outpace bigger companies’ growth.
The market’s major disappointment in 1993, relatively speaking, was the blue-chip Standard & Poor’s 500 index, the most widely used benchmark for mutual funds that attempt to match the market’s performance. The S&P; gained 7.1% for the year. With dividend income, however, the total return is estimated at just above 10%.
While a 10% return still handily beat the 2.7% that investors would have earned by sitting in a money market fund for the whole year, Wall Streeters say the S&P;'s results since 1991 show that the U.S. market overall is becoming a tougher place to eke out attractive returns. The bull market, after all, now is 38 months old.
U.S. stock gains might have been better in 1993 but for the avalanche of cash Americans opted to instead pour into foreign stocks.
Most foreign markets turned in spectacular gains, as interest rates fell overseas (especially in Europe) and as investors worldwide bet on a stronger global economy in 1994.
The Hong Kong market, for example, leaped 115.7% for the year, with the Hang Seng stock index shooting from 5,512.39 at the start of the year to 11,888.39 at the close. Taiwanese stocks soared an average 79.8%, German stocks 46.7% and British shares 20%.
Passage of new world trade accords in December, after seven years of international wrangling, boosted optimism about overseas markets, sparking an explosion of buying during the month. Indeed, the list of markets at or near new highs at year’s end extended from Karachi, Pakistan, to Kuala Lumpur, Malaysia, to Mexico City.
But some veteran investors now warn that foreign markets have become overheated and are vulnerable to a selloff. “The intensity of the investor craziness about emerging markets suggests to me that a cold bath is in the offing,” warns Barton Biggs, investment strategist at Morgan Stanley & Co. in New York.
Many Wall Streeters fear the same about U.S. stocks, though the doubters admit they are beginning to sound like broken records. “Nobody thinks the market can go down next year,” complains a worried David Shulman, investment strategist at Salomon Bros. in New York.
Revived fears of higher interest rates could be the catalyst for at least a short-term pullback early in 1994, analysts say. Rates have been creeping higher in recent months as the economy has surged.
The 30-year Treasury bond yield, the benchmark for long-term interest rates, hit a 20-year low of about 5.8% in the fall, after starting the year at 7.40%. The yield now stands at 6.35%, and a jump late in the week is what tripped the Dow industrials.
The bulls argue that interest rates needn’t move up significantly so long as inflation stays low. What’s more, even a rise from the current 2.7% money market fund yields to 3.7% probably won’t be enough to destroy investors’ hunger for stocks, some say.
“The country’s demographics are such that baby boomers are starting to step up their savings rates,” says Charles Albers, a veteran investor who manages the Guardian Park Avenue stock fund in New York. “Common stocks are the natural thing for the boomers to emphasize.”
So far, that still appears to be the case. A Fidelity Investments survey of small investors in December found that 52% of them plan on making new purchases of stock mutual funds soon. That’s down just slightly from 55% in November, a high that had been reached only once before (last February) since the Fidelity surveys began in 1990.
The Bull Market Chugs On * U.S. STOCKS PUSH AHEAD...
1993 price changes of key indexes: Dow transports: +21.6% Russell 2,000: +17.0% Nasdaq composite: +14/8% Dow Industrials: +13.7% S&P; MidCap: +11.6% NYSE composite: +7.9% S&P; 500: +7.1% Dow utilities: +3.7% * ...FOR A THIRD STRAIGHT YEAR, BUT...
S&P; 500 price annual change: 1980: +25.8% 1993: +7.1% *...BIG GAINS ARE OVERSEAS
1993 average stock gains, key markets: Hong Kong: +115.7% Malaysia: +98.0% Taiwan: +79.8% Singapore: +59.1% Mexico: +47.9% Germany: +46.7% France: +22.1% Britain: +20.0% Source: Reuters