Personal Finance > Investing
Stocks 2000: Return to earth
December 31, 1999: 2:00 p.m. ET

Analysts forecast year of tempered gains following a 1999’s stock surge
By Staff Writer Jake Ulick
graphic graphic
NEW YORK (CNNfn) - Another year, another record gain for the U.S. stock market. But can the gains continue?
    Yes -- but not at the same frothy pace.
    That’s according to a sampling of Wall Street analysts, who expect the major market indexes to rise in 2000, but at a slower rate than in 1999.
    Solid corporate earnings coupled with continued demand for new technology bode well for the major U.S. stock indexes. So do expectations of a buoyant economy at home and a recovering one overseas.
    But a much anticipated series of Federal Reserve interest rate hikes could temper stock gains, as companies face steeper borrowing costs and equity investors shift money into higher yielding bonds.
    "Year 2000 is shaping up to be a classic confrontation between rising consensus profit exceptions and more stringent Fed policy,” said Christine Callies, chief investment strategist at Credit Suisse First Boston. "The Fed is likely to win this contest because it cannot afford to lose it.”
    But the biggest x-factor could be psychology. For years, analysts using a variety of criteria have declared the stock market overvalued. But investors mostly disagreed, showing a willingness to push stocks, particularly technology shares, to heights that defy historical precedent.
    Qualcomm (QCOM), the year’s best performing stock, rose more than 2,300 percent in 1999. This means that shares of the wireless technology provider now trade at a stratospheric 529 times earnings.
    How long will investors keep bidding these prices higher is anyone’s guess.
The year ahead

    For years, Abby Joseph Cohen, the influential Goldman Sachs strategist, called the S&P 500 undervalued. For years, investors agreed, pushing the index of large companies to its fifth straight double-digit percentage gain in 1999.
    But in a recent report Cohen reversed course.
    "The S&P 500 is ending 1999 at roughly fair value, in contrast to the investing undervaluation of prior years,” Cohen said. "This suggests that price appreciation will be closer to historical trends, as will volatility.”
    Cohen predicts the S&P 500 index will hit 1,525 by the end of 2000. The 4 percent gains would be way behind 1999’s 19.5 percent advance She sees the Dow Jones industrial average hitting 12,300 by the end of 2000. Those gains of 7 percent would be well off 1999’s 25 percent surge.
    This vision of a tempered ascent, echoed among analysts, is generally based on the give-and-take of two-conflicting forces.
    On the one hand, corporate earnings growth should be strong in 2000. Based on analysts’ estimates, First Call Corp forecasts a 17.2 percent average earnings gain for companies in the S&P 500 next year.
    But this kind of profit growth could take a back seat if the Federal Reserve, as expected, begins a series if interest rate hikes in February.
    Concerned that the nation’s strong consumer spending, low unemployment and rising commodity prices will lead to inflation, the Fed tightened credit  three times in 1999. With those inflation-suggesting forces still in play, analysts say the Fed’s job as inflation fighter isn’t over.
     "My guess is people will start focusing on rate hikes and the market will come to Earth at some point,” said Phil Dow, stock market strategist at Dain Rauscher Wessels, "We are a little worried about what the Fed might do because Chairman (Alan) Greenspan gets everyone’s attention when he raises rates.”
    How many rate hikes? When will they happen? Most analysts foresee a quarter-point hike in February. That would push the Federal funds rate to 5.75 percent. Some see another quarter-point hike in March. Others forecast a total of three rate hikes throughout the year.
    But a consensus is emerging that the nation’s central bank will get its rate hikes out of the way before the 2000 presidential election in November. This kind of anticipatory monetary policy is not without precedent. The Fed in minutes from its Nov. 16 meeting said it hiked rates then in part because Y2K concerns would prevent it  from doing so in December .     
Sector spectre

    Technology investing, which led the market higher in 1999, appears set to get a lot more selective this year.
    "We continue to believe that quality technology companies are very attractive for long-term growth, but be prepared for a bumpy balloon ride -- lots of volatility, but more volatility up than down,” said Al Goldman, chief market strategist at A.G. Edwards.
    Goldman has a year-end 2000 target of 1,700 for the S&P 500. He’s one of the few analysts to forecast the Nasdaq, which he sees ranging between 4,800 and 5,000 at year’s end.
    Elizabeth Mackey, chief investment strategist at Bear, Stearns, is hardly bearish on technology.
    Still, she questions the sector’s ability to sustain its gains
    "It’s important to remember that manias in the stock market do not end well,” Mackey said.
    She sees investors revisiting cyclical stocks while focusing on companies poised to benefit from a recovery in overseas economies. She’s bullish on international stocks. Still, while Mackey sees the S&P MidCap 400 keeping pace with the SP 500 in 2000, she forecasts another tough year for small capitalization stocks.
    Like others Jeff Davis, global division chief investment officer with State Street Global Advisors, worries over the high valuations of technology stocks.
    "Things have gotten out of hand,” he said.
    As such, Davis is looking beyond some of last year’s tech winners to focus on well managed, out-of-favor firms that can benefit from a global economic recovery.
    Two of his picks: Coca-Cola  (KO) and BestFoods (BFO), both of whose stocks fell in 1999
    It’s not Qualcomm, but food and drinks may be the perfect metaphor for 2000, when analysts see the market returning to more Earthly levels of growth. Back to top


Special Report: A Century of Wealth


Track your stocks

Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney