Stocks End on Volatile Note

By TOM PETRUNO

Jan. 1, 1999 12 AM PT

Was it a bull? A steer? A bear? A chicken? All of the above?

Wall Street historians may never agree on what to call the U.S. stock market’s wild ride in 1998, but that’s somehow appropriate: At several points in the year the market left just about everyone speechless.

For sheer excitement, 1999 will find ’98 tough to beat. But many market players figure the new year holds plenty of surprises of its own for investors, given the challenges lining up for the economy, corporate profits and global financial stability.

Thursday’s trading was a fitting way to end it all--that is, in mild disarray. The Dow Jones industrial average dropped 93.21 points, or 1%, to 9,181.43. That left the blue-chip index with a gain of 16.1% for the year, still more than enough to make 1998 the fourth straight year of double-digit returns, even though the Dow finished 2.1% below its record high of 9,374.27 set Nov. 23.

But the broad market was far stronger than the blue chips on Thursday, with rising stocks beating losers by 23 to 8 on the New York Stock Exchange. And the Nasdaq composite index refused to close out ’98 without a new high. It surged 25.74 points, or 1.2%, to a record 2,192.69, lifting its gain for the year to a stunning 39.6%.

Most investors, however, didn’t earn that kind of return on their portfolios. Indeed, the criticism that dogged Wall Street for most of the year was that only a relative handful of big-name stocks were holding the market up.

Still, even with losses for the year in the average smaller stock, many investors will probably be counting their blessings this New Year’s Day. It could have been a lot worse--and indeed, it was a lot worse just a few months ago, with the Dow down nearly 20% from its summer peak amid legitimate fears of global financial calamity.

Here’s a look at some of the highlights and lowlights of 1998--and major market issues for 1999--through the experiences of some of last year’s winners and losers in global financial markets:

* Winners: the investors who trusted the new “Nifty Fifty” stocks, despite soaring valuations.

Early in the year, the argument against buying these stocks--Microsoft, GE, Procter & Gamble and other select multinationals--was that they were too expensive relative to underlying earnings.

But they just got more so, despite the late-summer market dive that briefly dented them, and most stocks. At the start of the year Microsoft was priced at 49 times its most recent 12 months’ earnings per share. Today it’s at 68 times.

Thanks to the performance of these arguably gilded stocks, the Standard & Poor’s 500 index rose 26.7% for the year, marking the fourth straight year of 20%-plus annual price gains--the first time that has ever happened.

But one key question looms for ‘99: Where is the corporate earnings growth to support these stock gains? Despite a still-strong U.S. economy, earnings overall were under heavy pressure in ’98. The bulls say earnings are in a temporary lull. The bears say, “You better be right!”

* Losers: smaller stocks, which is most of them. The Russell 2,000 small-stock index lost 3.5% for the year. That was a vast improvement from early fall, when the index was off 30% from Jan. 1. Still, small-stock investors now have suffered five years of returns that sharply lag the big-stock S&P; 500.

Why is Wall Street so relatively uninterested in smaller stocks? Their fans argue that most investors are simply overly enamored of blue chips and of technology stocks. When those infatuations end--as they all eventually do--investors will rediscover the value in unloved smaller stocks, the shares’ proponents say. Maybe even in 1999.

Maybe. But with the U.S. economic expansion growing more aged (though not necessarily infirm), Wall Street fears a full-blown recession somewhere over the horizon. And history says small stocks always take huge hits in recessions.

In any case, small-stock value hunters were out in force on Thursday: The Russell index jumped 2.4% for the day, while blue chips slid.

* Winners: European stock markets. Most of them rallied sharply, and their gains for the year beat the S&P; 500 gain, on balance, when measured in dollars.

The German market, for example, rose 26.9% in dollar terms. The French market zoomed 41% and the Finnish market leaped 80%.

It helped that European currencies rose in value against the dollar in the first half. The dollar then strengthened a bit in the fourth quarter, despite optimism over the dawn of Euro monetary union.

Still, for the most part European stock markets’ performance was driven by rising demand for the shares on the continent and abroad. Many Wall Street pros believe monetary union will provide a boost to economic growth in 1999 and beyond--and the natural place to be, if you believe that, is in equities.

A merger boom in Europe, fueled in part by approaching union, also drove stocks higher, and may continue to do so in ’99.

* Losers: Japanese stocks. The Nikkei-225 index recorded its third straight yearly loss in 1998, falling 9.3% in yen terms.

At 13,842 at year’s end, the Nikkei was up from its low of 12,787, but down 20% from the year’s high. Despite many signs that Japan finally is taking its economic depression seriously, Japanese investors themselves aren’t convinced. And ominously, those same investors now are demanding higher Japanese government bond yields--apparently fearful of their government’s soaring debt load.

* Losers and Winners: most smaller Asian markets. That is, they were major losers in the first nine months of ‘98, as the financial crisis that began in mid-1997 reached what may have been its zenith.

But even as Asia’s economic woes spread to Russia and Latin America in August and September, driving currency values down and interest rates up and shaking markets worldwide, many Asian markets were showing signs of bottoming.

Supported by International Monetary Fund bailouts, South Korea and Thailand, among others, appeared to be making progress in what is still expected to be a long economic recovery process.

Result: South Korea’s main share index zoomed 84% in native-currency terms in the fourth quarter, lifting it nearly 50% for the year.

The Thai market jumped 40% in the quarter, though that still wasn’t enough to bring it back to even for the year: The loss for the 12 months was 4.5%, after a 55% drop in 1997.

* Winners: almost any stock ending in “.com” or “.net.” The Internet stock craze may be the stock mania to end all stock manias. Yahoo, the Net directory firm, saw its shares end the year at $236.94, down $7.69 on Thursday and off 17% from the recent peak of $286. Still, this was a $29 stock earlier in the year.

Are investors--apparently most of them individuals--nuts to be paying these prices for businesses that as yet have no earnings and no guarantee of long-term survival in the cutthroat virtual world?

That’s what the bears said nine months ago, six months ago and three months ago. What’s clear is that with every new uptick in the share prices, the downside risks grow. But what a potential Net-stock crash in ’99 might do to the market overall is hard to gauge.

* Losers--so far: all of the smug traders who tried to “short” Net stocks for most of the year.

* Losers: investors who thought commodities like gold, corn and oil were cheap a year ago. They got considerably cheaper, as demand was crimped by Asia’s woes while many commodity producers, evidently hoping against hope, failed to significantly trim production.

For the year the Commodity Research Bureau index of 17 key commodities fell 17%.

* Winners: owners of government bonds in the U.S. and Europe. As investors’ outlook reached its most pessimistic in August and September after Russia’s collapse, for a time the only paper many people wanted to hold was sovereign government debt--triggering a bidding war that pushed yields down sharply (and bond values up sharply).

Then, the Federal Reserve and European central banks rode to the rescue, cutting official interest rates and putting more downward pressure on yields. The 30-year U.S. Treasury bond yield ended the year at 5.09%, versus 5.92% a year ago.

So Happy New Year to you, too, Mr. Greenspan!

* COMING SUNDAY: Our annual investment review and outlook takes a comprehensive look at the year in the markets and funds, and provides insight into what could happen in the new year.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Wall Street’s Wild Year

The bulls and bears both were right in 1998, a year of stunning volatility that saw the worst U.S. stock market declines since 1990. Yet by Thursday’s close leading blue-chip indexes were back near record highs. Markets worldwide also resurged in the fourth quarter, thanks to lower interest rates in most economies--and hopes that 1999 won’t bring global recession.

. . . But Other Stock Market Indexes Are Mixed . . .

1998 price changes (native currencies):

South Korea/composite: 49.5%

U.S./Nasdaq composite: 39.6

Germany/DAX: 17.7

U.S./NYSE composite: 16.6

U.S./Dow industrials: 16.1

Britain/FTSE-100: 14.6

U.S./Dow transportation: -3.3

U.S./Russell 2,000: -3.5

Japan/Nikkei-225: -9.3

Mexico/Bolsa: -24.2