1995-96 REVIEW AND OUTLOOK : How Those Who Predicted a Hot ’95 See the Coming Year

They were among the few who called 1995 correctly. Will they be right about 1996?

Nobody knows what’s in store for stock mutual funds next year, of course, but a good place to seek forecasts is among the small group of money managers and newsletter writers who predicted a big bull market in 1995. After a year of flat-to-lower performance in 1994, coupled with traumas relating to derivatives, the Mexican peso devaluation and rising interest rates, there wasn’t a whole lot of optimism for big gains in the financial markets a year ago.

But the year proved to be surprisingly strong, with the average stock fund surging about 30%.

The following were among those who anticipated that 1995 would turn out favorably, based on comments made around the start of the year. Here’s a review of what they said then--and what they say now.

* Ronald Elijah, Robertson Stephens Value & Growth Fund, San Francisco

There are “three letters to describe the market in 1995--BUY,” Elijah was quoted as saying in a press release his firm issued on Dec. 27, 1994. This optimism was fueled by an opinion that stock valuations were low and that inflationary pressures would ease. Elijah’s view was all the more remarkable given the pessimism expressed by Paul Stephens, the firm’s chief investment officer, in the same release.

Elijah continues to view stocks as offering potential. “Our valuation work on the market continues to show excellent value today relative to inflation and interest rates,” he wrote in a recent letter to shareholders. Technology stocks, particularly semiconductor firms, look especially attractive in view of 1996 profit forecasts, he added.

* James M. Weiss, State Street Research & Management, Boston

A year ago, Weiss was helping to call the investment shots for stock funds of the IDS group of Minneapolis. In a Jan. 3, 1995, article in the Wall Street Journal, he was the only solid bull of seven market analysts quoted. He figured U.S. interest rates were near a peak and that the Federal Reserve Board would be able to pull off an elusive “soft landing” of the economy.

An “environment of slower, sustainable growth with minimal inflation gains should be good for stocks,” he said then.

Today, Weiss works as deputy chief investment officer for State Street Research in Boston, helping to set direction for the firm’s domestic stock mutual funds. But even with a change of employers, he’s sticking with a bullish forecast.

“I think the market will do fine in 1996,” he says.

Among favorable factors, Weiss cites a benign interest-rate trend, low inflation and moderate valuations for stock prices. The U.S. market in 1996 is likely to return 10% to 11%, in line with its historic average, and the outlook for foreign markets is promising as overseas economies shift into higher gears, he says.

One caveat is that U.S. corporate profits won’t rise so robustly in 1996, which means the year won’t see such a broad, sustained stock-market advance, Weiss figures. Operating profits surged an estimated 22% in 1995, he says, but that’s likely to drop to about 8% in the coming year. “The frequency of negative earnings surprises will increase,” he warns.

Technology stocks, as well as health-care and consumer-products companies, are among his favorites.

* L. Roy Papp, L. Roy Papp & Associates, Phoenix

A year ago, Papp sensed the interest-rate climate would soon change for the better. In a Dec. 30, 1994, letter to shareholders of his L. Roy Papp Stock and Papp America-Abroad funds, he asserted that the trend to higher rates had mostly played out, and that threats posed by derivatives, the Mexican peso devaluation and other traumas were minimal.

“I do not see any new dark clouds at this time and thus feel that our economy is growing soundly and fairly safely,” he wrote. “Stocks are attractive for the long run and still offer the best long-term returns.”

Papp kept both funds fully invested in stocks and enjoyed good gains in 1995. He hasn’t altered course.

“The stock market will be fine, and bonds too,” he says of 1996.

Papp concedes that market valuations are on the high side, but he feels several of these measures have lost their predictive ability. For example, book value no longer is an important yardstick, as the measure has been skewed by corporate restructurings and inflation. Similarly, dividends don’t matter so much as they once did, as company buy stock instead or reinvest wisely.

Taking a broader view, Papp believes that the steady growth of world trade, the rising popularity of English as a language, the end of the Cold War and other macro factors will continue to benefit U.S. companies.

* Paul Wick, Seligman Communications & Information Fund, New York

At the end of 1994, Wick was coming off a milestone year in which his portfolio surged 35%, three times the gain of the average technology fund. But Wick didn’t think it was time to take profits just yet.

Even with the rally in technology stocks in 1994, he perceived that investors remained nervous about this broad industry--a bullish contrarian sign. He also figured the stocks were still trading at reasonable valuations and so predicted further gains. Wick’s optimism was justified many times over, as technology stocks led the market’s roar in 1995.

So where does he stand now? A recent statement from Seligman’s small-stock and technology team, of which he’s the most prominent member, affirms the “long-term viability” of the technology sector. The team sees further strong sales of personal computers and doesn’t anticipate any sharp drop in semiconductor orders in 1996. The industry’s fundamentals, in short, remain strong.

* Price Headley, Fund Profit Alert newsletter, Cincinnati

Among newsletters that track mutual funds, probably none was more optimistic than Fund Profit Alert.

“You are looking at an unusually attractive and potentially historic buying opportunity right here,” the newsletter said in its edition of Nov. 3, 1994. “Mutual fund players should buy equity funds with both hands here in preparation for a major rally.”

Fund Profit Alert reiterated that bullish viewpoint in its Jan. 5, 1995, edition, citing the likelihood of a “positive stock market surprise.” Among the factors viewed favorably was the widespread pessimism among investors that then prevailed.

The newsletter’s sanguine outlook hasn’t dimmed much. “We’re projecting 5,700 [on the Dow Jones industrial average] sometime later in the second half of 1996,” says Senior Editor Price Headley. “It will be a solid year, but not a blowout.”

Headley believes interest rates remain favorable and that investor expectations, although rising, haven’t yet turned speculative. He also predicts the market will get a lift because 1996 is a presidential-election year--traditionally a good time to invest.

One cloud on the horizon is the possibility of a cut in the capital-gains tax rate. This could exert a short-term drag on prices by encouraging some people to sell. But over time, lower rates would stimulate the economy, encourage people to invest and thus boost stock prices, Headley says.