1995-96 REVIEW AND OUTLOOK : Countdown to a New Millennium : As 2000 Looms, Hope and Fear Court Investors
As if investors didn’t have enough to think about, get ready to deal with the ultimate market rumor: the end of the world.
The clock is ticking on the last of the 20th century and the 2nd millennium, and the hype over what the year 2000 will bring is just beginning to mount in the national psyche and on Wall Street.
Belief in the impending demise of civilization, always a popular theme with a small slice of society, is virtually certain to pick up more converts soon--to the dismay of stockbrokers everywhere. Annihilationists don’t make great customers for long-term securities.
Thankfully for the brokerage industry, however, for most people the countdown to the new millennium isn’t likely to take on such grisly overtones. But many historians still predict a growing anxiety as 2000 looms, a deepening sense that while the world itself isn’t terminal, great changes lie ahead that will dramatically alter the world as we know it, or knew it.
For investors--whose fortunes can either be enhanced or destroyed by economic and social change--1996 provides a fitting platform from which to look and plan ahead.
Blessed by astonishing good luck so far this decade, U.S. stock and bond investors have made much more money than had been popularly predicted six years ago. The Dow Jones industrial average has risen 86% since 1989, and long-term government bond yields have tumbled from 8% to 5.94%.
And because a large portion of the markets’ advance has come in 1995--the Dow’s best year since 1975--there is widespread resignation that 1996 can’t possibly top its predecessor, and even that some of this year’s progress must be reversed in the near future.
Thus, long-term investors may now feel more pressure to truly think long-term, forcing their gaze out toward the 20th century’s end, with all of the attendant hope and fear that people automatically affix to significant turnturning points on the calendar.
But will the coming of 2000, in and of itself, influence behavior, making a continuing bull market in stocks more likely, for instance--or a horrendous bear market?
Not surprisingly, consultants who are paid to mull these things argue that people will be affected by the countdown to 2000 far more than they now might perceive, with powerful direct or indirect implications for financial markets.
The Rhinebeck, N.Y.-based Trends Research Institute contends that “millennium fever” is real and rising, consciously or subconsciously manifested in such trends as the public’s increasing distrust of institutions (government, education, organized religion) and the boom in those ubiquitous psychic telephone hotlines.
Rationally, people know that 2000 is merely a number. But “symbolically, emotionally, psychologically it represents a critical point--the fulcrum on which a new age will turn,” Trends Research Institute declares in its annual trend-outlook newsletter.
Institute Director Gerald Celente puts it another way: “You’re going to see people who you thought were sane flip out” as the new millennium grows nearer. Which is not exactly a comforting thought if the flippee happens to manage your mutual fund.
Indeed, the conventional wisdom about the end of centuries (or fin de siecle as these periods have come to be labeled in literary discussions, using a 19th century term meant to infer resignation and decay) is that they have always triggered mass panics as many people assume a coming cataclysm.
Yet in the book “Century’s End: A Cultural History of the Fin de Siecle From the 990s Through the 1990s” (Doubleday, 1990), author Hillel Schwartz wrote that much of the madness attributed to ‘90s decades since the end of the 1st millennium is in fact mythical.
For example, while many historians have contended that the approach of the year 1000 in Europe led to huge pilgrimages of the ruling class to Jerusalem, mass abandonment of livestock and crops by peasants and a general uncaring attitude toward material wealth, Schwartz dismisses most of it as bunk.
If you imagine what life was like between 1000 and 1900--most people were too busy just surviving to waste time contemplating a particular year’s significance--Schwartz’s point is well-taken.
Nonetheless, Schwartz allows that humankind’s last fin de siecle experience, in the 1890s, was “more extreme . . . than any before,” owing to the “intense anticipation of the 20th century” and the fact that that anticipation could be communicated worldwide for the first time via the mass media of the day (mainly print journalism).
In the 1890s, “The boom in speculations about the future gave rise to almost as many fictive dystopias as utopias,” Schwartz wrote, leading a confused public “as easily to feelings of helplessness in the face of an overwhelming complexity as to pride in the approximate mastery of a universe of data.”
If that sounds eerily like our own decade, some historians have noted other strong parallels between the 1890s and the 1990s: Both will be remembered as periods of extraordinary social change and technological advancement, of stunning corporate merger activity, price deflation and sharp declines in interest rates.
And what did that mean for stock prices in the 1890s? The United States was an “emerging market” in that era, naturally prone to wilder swings than Americans have been used to in the 1990s. What we know of the general trend in prices comes from Dow Jones & Co. founder Charles Dow’s initial attempts to popularize a stock index.
The Dow Jones industrial average wasn’t born until 1896, but Charles Dow daily calculated an index of mostly railroad stocks before that. His records show a troubled market for much of the decade, with the rail index riding an erratic path downward between 1889 and 1897, from 72.06 to 51.33, a 29% decline.
But the stock market began to resurge in the final years of the decade, fin de siecle anxiety notwithstanding. Dow’s new industrial average rose from 40.74 at the start of 1897 to 66.08 by the end of 1899, for a gain of 62%.
Yet what the 1890s stock market tells us about Wall Street’s outlook today is probably . . . not much, analysts admit.
For many investment pros, the fear that markets may be buffeted between now and 2000 stems less from a belief in the power of that number itself to trigger change as from its potential to intensify societal and economic trends already underway.
Among those key trends:
The Aging Population
Nothing stokes Wall Street optimists’ bullish argument for stocks andand bonds like the one seemingly unalterable trend in the developed world: The graying of the population, as the aging post-war generation enters its prime savings years of 40-plus.
The first American baby boomers turn 50 in 1996. The boomer generation in total numbers 76 million, nearly 30% of the entire U.S. population.
In Europe and Japan the graying is even more pronounced, and birth rates even lower than in the United States. What that translates into are high savings rates, relatively low consumption rates and the potential for continued subdued inflation, experts say.
For the 1990s and beyond, “The new dynamic . . . is that aging populations in the industrialized world will increasingly generate surplus capital, which will be reflected in low domestic interest rates and the persistence of low nominal growth” in those economies, says Richard Hokenson, a demographics specialist at brokerage Donaldson, Lufkin & Jenrette Securities in New York.
Indeed, this demographic shift--the reverse of what the developed world experienced in the 1960s and 1970s--is one of the primary reasons why some investment pros confidently predict that long-term bond yields will soon fall to new 20- or 30-year lows, and will trade in a fairly narrow band for a long time.
The yield on the benchmark 30-year Treasury bond, now 5.94%, “Will remain in the 5% to 7% range for the balance of the century,” contends William Gross, managing director at bond giant Pacific Investment ManagementManagement Co. in Newport Beach.
For bond owners that will mean much lower returns ahead. And that, in turn, will by necessity continue to push nest-egg-building, long-term investors into stocks, many Wall Streeters say.
So far in this decade that demand has been enough to lift the market as a whole. Yet if Americans’ consumption continues to suffer in the name of saving, there may be plenty of companies--and stocks--on the losing end of the demographic shift. Profits, remember, are what ultimately drive share prices: Without the former it’s tough to support the latter for long.
Already in the 1990s, U.S. clothing makers and retailers, auto makers and furniture producers have typically been lousy stocks to own.
Industry winners, meanwhile, have included many health-care companies, financial services providers, semiconductor makers, entertainment providers and other companies whose products or services fill what people believe are the real needs in their lives.
These investment trends won’t change with the century’s end, says Trends Research Institute’s Celente. And if U.S. consumers’ general propensity to spend continues to decelerate, the game in the stock market will increasingly be to own companies that provide what Americans truly want, or multinational companies that derive most of their growth from overseas, especially in the burgeoning Third World.
The Spread of Technology
The 1995 mania for U.S. technology stocks has unquestionably crescrested, and with the pullback in many of those shares some Wall Streeters are prophesying a widespread bust in the computer business in general.
Yet, looking ahead to 2000, most investment pros say it’s inconceivable that technology will play a lesser role in the world economy’s growth than it does today. Just think of how much more pervasive computers and other electronic devices are in your own life versus five years ago.
But while there is certainly money to be made in technology stocks between now and the end of the millennium, picking the right companies in a business where product life cycles are measured in months rather than years won’t get any easier, experts concede.
The sudden rise of the worldwide Internet in 1995 is a case in point, says Eric Miller, investment strategist at Donaldson, Lufkin & Jenrette. “Is there really going to be a $400 to $500 [Internet-browsing] computer that diminishes the market for higher-priced personal computers? There’s no way of knowing that yet,” Miller notes, but it is a big risk.
Despite the technology boom of the last six years, the list of major computer companies whose shares today are below their year-end 1989 levels is sobering: Amdahl, Apple, Cray Research, Digital Equipment, IBM, Sequent and Tandem, to name a few.
“It becomes harder and harder for people to pick individual tech stocks,” says Steven Nagourney, investment strategist at Lehman Bros. in New York. “It’s hard to say that you can buy a Motorola and just put it away. They’ll be a survivor, but if you take your eye off the ball. . . .”
And yet, Nagourney adds, “The world is becoming technologically dependent on the United States,” and ignoring that fact is ignoring great opportunity. But to invest in this exciting arena, “You’re better off in a diversified portfolio” of tech issues, he suggests.
The Metamorphism of Capitalism
The 20th century may technically end Dec. 31, 2000, but to some historians the curtain really came down in 1989, when the Berlin Wall fell and the Soviet empire began to dissolve.
What has transpired since, argues Lehman’s Nagourney, is not the beginning of the 21st century, but an interregnum. “We’ve seen the end of the Old Order, but it’s not a New World Order” quite yet, he says, despite former President Bush’s famous declaration to the contrary.
Why? Along with the Berlin Wall, the 200-year-old preeminence of the Eurocentric world has also crumbled in the 1990s, Nagourney says. In Asia, in the Middle East, in Latin America, in Africa, other civilizations, cultures and religions are rapidly reasserting themselves, he notes.
And although most of the world is now viewed as embracing capitalism, it’s not at all the same brand of capitalism--or the same normally accompanying political freedom--from Russia to China to Malaysia to Mexico, etc.
That is setting the stage for increasing conflict among and within competing economic systems, Nagourney says. One example: “I see a great debate coming over global free trade versus bilateral trade,” he says.
Despite the promise of unfettered world trade embodied in the General Agreement on Tariffs and Trade, many countries may find that structuring trade within bilateral investment plans--I invest in your country, you invest in mine--makes more sense in that it may avoid the work force decimation that true free trade can provoke, Nagourney says.
On a more basic level, the debate over trade surpluses and deficits will be a continuing source of friction among many nations, warns Gerald O. Barney, president of the Millennium Institute, a think-tank in Arlington, Va.
“Every single country is assuming they’ve got to export more than they import. But that just can’t happen,” Barney says.
For investors, the message here is that great obstacles block the road to the golden age of global capitalism envisioned with communism’s demise. Moreover, “These are the kinds of things that cause volatility in [financial] markets,” Nagourney notes.
And volatility can beget a loss of faith. Indeed, as the experience of Japan, and most recently Mexico, has demonstrated in the 1990s, being capitalistic isn’t enough to guarantee a healthy bull market in stocks. If investors lack faith in a market, for whatever reason, even highly favorable demographics won’t help it. People will find other things to do with their money.
That is why the outcome of the balanced-budget debate in the United States may be key to maintaining the 1990s bull market on Wall Street.
However small the annual U.S. deficit has become relative to the size of the economy, investors have come to view a balanced budget agreement as a test of America’s commitment to strong markets and to capitalism. It has thus become a test the country can ill afford to fail.
Rising Worker Activism
Corporate downsizing has continued at a brisk pace in recent years despite record profits. So too has low wage growth. The result has been a growing sense of abandonment and frustration on the part of many workers.
Now the same brand of downsizing is underway in Europe and Japan, all in the name of ensuring corporate competitiveness.
That’s great for companies’ bottom lines and for maintaining low inflation (by keeping business costs down). But will workers accept this fate forever?
Some Wall Streeters don’t think so. Stephen Roach, economist at Morgan Stanley & Co. in New York, believes that “we are coming closer and closer to the point at which workers will say ‘no’ to the labor-saving tactics of corporate restructuring.”
Unions, despite their much-reduced status, may well lead a new worker activism campaign for better wages in the late 1990s, Roach says.
Celente of the Trends Research Institute agrees. In fact, “reunionization” is one of the Institute’s “Top 10 Trends” for 1996. The arrival of an aggressive new AFL-CIO president in John L. Sweeney, and a shift in the organization’s focus to lower-wage earners, will begin to reverse a four-decade downtrend in unionization, the institute says.
More important, “Reunionization will be a global trend, encompassing both skilled and unskilunskilled labor pools. It will lead to social unrest and new political parties at home and abroad,” the Institute predicts.
Today, of course, most investors are workers themselves, so rising activism may have broad appeal from a paycheck point of view. But if activism succeeds too well, it could sow the seeds of higher inflation and threaten to halt the dismantling of generous, economy-draining government welfare programs, especially in Europe. Either development could make continuing bull markets in stocks and bonds much more iffy.
The Return of the “Mega-Worries”
From a U.S. perspective, the world has been extraordinarily lucky in the last six years. The Soviet Union broke up relatively peacefully. Iraqi President Saddam Hussein’s threat to the Mideast was put down quickly. China’s rapid changeover to a capitalist economy has been achieved without massive civil strife. And world terrorists have wrought far less death and destruction than many people imagined would be the case in the ‘90s.
But will the planet’s good luck begin to run out as 2000 nears? Millennium Institute’s Barney believes that many of the pressing concerns that have fallen out of world consciousness in recent years--population control, water shortages, food shortages, the threat of nuclear terrorism--will return to the fore with the century’s end.
Conceivably, any potential massive shock in these areas could zap the global economy and send markets reeling.
But then, what if our luck holds out? The wisest course, as always, isn’t to avoid investing because of disasters that might occur, but to be mentally prepared for them, and to realize that problems also produce opportunities.
Barney predicts, for example, that there will be increasing investment potential in industries connected to more efficient food production (biotechnology, perhaps), population control (better contraceptives) and technology and services to reclaim ruined farmland.
He also believes that whatever mass anxiety may grip the world in the run-up to 2000, the dawn of 21st century and 3rd millennium will produce an equally powerful new optimism.
For investors who can hang on, “I think there’s going to be a sense of boundless opportunity” in the new millennium, he says.
As Hillel Schwartz wrote about century’s end: “We have always made it through, and we have regularly been surprised at just how we did it.”
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A Banner Year for Stocks
Adjusted to a common scale for 1995, the Dow Jones industrial average of 30 blue-chip stocks rose in lock-step with the broader S&P; 500 index and the marketwide Wilshire 5,000 index. The Nasdaq composite index--heavily weighted with technology stocks--pulled ahead of the pack midyear and stayed there despite a sell-off in those issues later on. The Russell 2,000 index, made up exclusively of small-company stocks, trailed the overall market. Comparative performances; Dec. 30, 1994 = 100 for each index:
Nasdaq composite: +39.92%
Dow Jones industrial average: +33.45%
Russell 2,000: +26.21%
Decade’s Leaders, Laggards So Far
Here are some of the stock industry groups that have performed best, and worst, thus far in the 1990s, measured from year-end 1989 through November of this year. The data are based on stocks within the Standard & Poor’s 500 index. The S&P; itself rose 74% in the period.
Avg. % Leaders change Semiconductors +435% Soft drinks +243 Defense electronics +223 Computer Software +207 Restaurants +153 Personal loans +137 Drugs +123 Medical products +122 Money center banks +107 Entertainment +91
Avg. % Laggards change Oil/gas drilling -28% Pollution control -18 Retail stores -15 Airlines -9 Gold mining +6 Textiles +7 Newspapers +29 Furniture/appliances +35 Autos +37 Clothing retailers +48
Selected groups are shown, not absolute rankings.
Price changes only (dividends not included).
Source: Standard & Poor’s Corp.