Will Wall Street have a Y2K hangover?

By Jane Bryant Quinn
Washington Post Writers Group
December 5, 1999
For Y2K pessimists, the end is near. We'll soon know whether the world will run into more trouble than most people think. Investors will, or will not, suffer last-minute jitters, as the millennium draws near.

Yes, yes, I knowit's not yet the millennium, from a technical point of view. As a stern band of readers likes to remind me, only morons believe the millennium falls on Jan. 1. The 1,000-year span actually ends on the year's last day, Dec. 31, 2000.

Well, that may be their millennium, but it's not mine. I'm partying now. A more interesting question than calendar dates is whether the stock and bond markets will be partying, too.

Has the Y2K selling already happened (as I believe) or will it erupt in the final days? At this writing, we seem to be having the usual year-end rally. But will we wake up with a hangover?

Most economists think not. Business is still booming, which suggests another modest interest-rate hike, sometime during the next six to nine months, says economist Allen Sinai, president of Primark Decision Economics in New York.

"But by cooling things down, the hikes will preserve the expansion," Sinai says. "It's still a great equity bull market. It just won't rise as much as it did in the past."

Bond-fund managers have been shouting and waving their hands, trying to attract your eye. "High-yield bonds are very cheap," says Theresa Havell of Havell Capital Management in New York. She thinks that total returns could reach 15 percent to 18 percent next year. As for tax-free municipals, "they're so cheap they're a giveaway," she says.

Still, it's hard to interest investors in bonds once they've sampled the thrills of growth stocks. Jeremy Siegel, finance professor at the Wharton School in Philadelphia, sees no end to their dominance.

Growth stocks have high and rising earnings and sell for high prices, relative to their earnings. Value stocks, by contrast, sell for low price/earnings ratios, and often are companies in trouble. In the 1970s and early 1980s, value stocks trounced growth. Then growth took over and never looked back.

Growth investors go wrong, however, when they try to pick a handful of winners, Siegel says. You might wind up with too much Coke and too little Lucent (or the opposite, when their relative market performance turns).

He also counsels against stocks with P/Es over 75, which currently include Cisco Systems, Sun Microsystems, Yahoo! and AOL. High P/E stocks that can't keep delivering staggering gains in earnings (or any earnings at all) eventually get beaten up.

The best growth-stock strategy? Buy a well-diversified mutual fund, Siegel says. One good candidate: the Vanguard Growth Stock Index Fund, which is the growth half of Standard & Poor's 500-stock index (the Value Stock Index Fund is the other half).

So far, the growth fund is up 15.2 percent for the year, compared with 8.5 percent for the value fund.

For those of you pining over Nasdaq (up 56 percent for the year), picking winners hasn't been as easy as you think.

More than 5,000 companies are officially counted in the Nasdaq index, but just 10 big stocks account for nearly half of its market capitalization and most of its 1999 gains, says Richard L. Babson of the Babson-United Investment Report in Watertown, Mass.

"Last year was the worst year of small-cap performance relative to large cap since 1929," says Greg McCrickard, manager of T. Rowe Price's Small Cap Stock Fund. "Their values are fairly compelling," he says, "but we don't know what would kick off a move."

There's one other group of fund managers shouting for your attention: those who shop abroad. "Sell the Dow, buy the emerging markets," says George Foot, managing partner of Newgate LLP in Greenwich, Conn., and a specialist in closed-end funds (those are funds that trade on stock exchanges).

Money has been flowing out of emerging markets funds all year, because of Y2K. Yet the Pacific funds, not counting Japan, are up 41 percent since January. "The region is in the early stages of a long bull market," Sinai says.

Japan funds, for that matter, are up 84 percenton constructive financial reform and solid growth, says Adam Posen, senior fellow at the Institute for International Economics in Washington, D.C. Europe has a growth story, too. For a decade, we've focused on U.S. stocks. In the '00s, it may be the internationals' turn.

(c) 1999, Washington Post Writers Group

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-- John Whitley (jwhitley@inforamp.net), December 05, 1999