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1997-98: REVIEW AND OUTLOOK

As a sea change brews this year for economies around the world, many investors are . . . Hanging Tense

Will '98 Bring Wipeout or a Good Ride?

January 04, 1998|TOM PETRUNO | TIMES STAFF WRITER

Investors searching for a successful investment strategy for 1998 may want to head down to the beach and study the ways of the lonely surfer.

To stay on your board--and stay alive--you must be nimble, focused and well-balanced. And have plenty of courage.

There may be no better advice on Wall Street this year than that, because what investors face is a potential tsunami of change in the global economy and in financial markets:

* The crisis in East Asia, where economies, currencies and stock markets are a shambles, still is far from resolved, and its far-reaching ramifications are only beginning to be understood.

* In the United States, pessimism is mounting over the ability of blue-chip multinational companies to sustain their phenomenal earnings growth of recent years in the wake of weakened Asian demand for goods and services, an inevitable flood of cheap exports from desperate Asian competitors, and rising wage pressures at home.

* In Europe, the decades-old dream of monetary union among major nations now is just one year from reality--but the risk that the agreement could unravel in advance remains high.

* And in stock markets worldwide, volatility has become extreme in recent months. On Wall Street, 100-point moves in the Dow Jones industrial average have become far too routine for some investors' comfort, encouraging a march into "safer" securities such as Treasury bonds.

What's more, the message of the record 555-point Dow dive of Oct. 27 still isn't quite clear: Was it a warning that the 7-year-old bull market is breathing its last, after an unprecedented run that has lifted the U.S. market's value by a stunning $6.2 trillion just since 1990 and doubled the number of Americans in the market to more than four in 10?

Precisely because the world has become so interdependent in this decade in terms of trade and investment, waves of change emanating from one region now can quickly produce dangerous riptides elsewhere.

Yet if the risk of wipeout in many markets is far greater in 1998, so too is the potential for savvy investors--the nimble, focused, balanced and courageous--to have a great ride, some Wall Street pros insist.

"I think there are many more opportunities than pitfalls" ahead, says economist Allen Sinai at Primark Decision Economics in Boston.

Is that too Pollyannaish? Maybe. Some economists, after all, are warning that the odds of outright world depression have increased substantially because of Asia's downfall.

While Merrill Lynch & Co.'s chief market analyst, Richard McCabe, isn't in the depression camp, he is telling his clients that the U.S. stock market could fall as much as 25% this year--which would be the worst decline since 1987--as the global economy slows because of Asia's turmoil and as more investors opt to cash out some of their huge gains from the 1990s bull market.

Certainly, under that scenario some stocks would fare better than others. But by definition a bear market is a time when many investors choose to seek cover rather than aggressively chase new investment opportunities.

And if a bear market is in fact upon us, meaning that stocks are poised to fall at least 20% from their 1997 highs, the resolve of millions of small investors in mutual funds will be tested as never before--because so many of those investors have entered the market just since 1990 and thus have no experience with nerve-racking share price declines.

As a story on D6 in today's section details, bear markets tend to be over quickly, but it still can take years to recover just to the break-even point if you buy stocks at peak prices before a bear cycle begins.

The math works out this way: If something falls 25% in price, it then must rise 33% to get back to where it was; a 40% price decline requires a 66% rebound just to return to break-even.

Those figures are no longer hypothetical in East Asia, where markets in countries such as Thailand and Malaysia lost more than 50% of their value last year.

For now, however, most investors in U.S. stocks are still counting their winnings from a third straight year of big gains:

* The Dow Jones average, at 7,965.04 as of Friday, is down 3.6% from its record high of 8,259.31 reached Aug. 6. But it still was up 22.6% for calendar 1997, after surging 33.5% in 1995 and 26% in '96.

* The average general U.S. stock mutual fund gained 24.4% in 1997, following a 31% rise in 1995 and a 19.5% return in '96.

* Even the Nasdaq composite index of mostly smaller stocks, although down 9.5% from its October peak, was up 21.6% for calendar 1997.

All of which means that if investors feel the need to shift their portfolios because of fear of what may transpire in the global economy and in markets in 1998, there is still time to do so. Damage to the U.S. market overall has been limited thus far, the last few months' wild swings notwithstanding.

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