A Year of Records and Rebuffs

It was a wild, loud, rambunctious year-long party on Wall Street again this year, but the party may be over.

In the meantime, many of the shell-shocked revelers of 1997 are heading into the new year with extraordinary gains.

Investors usually make about a 10 percent return on the stock market, but returns for each of the past three years have more than doubled that.

Those gains are especially evident on Wall Street itself, where average bonuses to investment bankers and high-powered mutual fund managers may top $1 million.

Pre-tax profits for investment houses this year should hit $12 billion, says the Securities Industry Association, spurred by torrents of retirement dollars flowing into mutual funds, plus a wave of mergers in banking, telecommunications and finance. That compares with just over over $11 billion last year.

It was also another year when technology and financial-service firms showed their moneymaking clout - at least early on. By year-end both sectors looked weak, especially high-tech firms with international exposure. Even Bill Gates and mighty Microsoft faced some turbulence, as the Justice Department went after the software giant for bundling its Internet software along with the Windows program that runs personal computers.

Among mutual funds, meantime, those that invested in the large, blue-chip companies of the Standard & Poor's 500 index again led the parade. But the pace may slow down as investors shift to managed funds and bonds.

Party pooped

In fact, experts here now wonder if the stock market party of the late 1990s may have ended, as corporate profits slow and deflationary clouds from Asia appear.

"The past year, really the past three years, has been phenomenal, just unique," notes Larry Wachtel, a vice president of Prudential Securities.

"It seems very unlikely that the market will be able to sustain that kind of momentum in 1998," he says.

"It was a very good year," says Greg Nie, chief market numbers cruncher for Everen Securities in Chicago. "But what a lot of people are now wondering is whether it may have been a pyrrhic victory," with the bull market now showing signs of aging.

Already, a defensive, "value" approach to picking stocks has been beating the more aggressive, momentum-oriented "growth" style.

And the S&P's 26 percent gain for the year to date doesn't tell what has happened since the fall, when the market tumbled on concerns about corporate earnings and Asian currency difficulties.

Asian markets that started crumbling in July finally rippled to Wall Street on Oct. 27, triggering a record 554-point drop in the Dow Jones Industrial Average.

While it subsequently began to rise back toward its prior high of 8259.31, reached Aug. 6, it has since been flat, says Richard McCabe, chief market analyst at Merrill Lynch & Co.

Mr. McCabe, like a rising number of market watchers here, expects a major correction in 1998.

Most analysts have predicted the downturn coming in the year's second half. But some now wonder if the correction will arrive earlier.

That concern explains the recent shift to bonds. Market technicians call it a "flight to quality."

Bail out to bonds

With inflation expected to remain low next year, thanks in part to a flood of low-cost imports from the Pacific Rim, bonds promise to remain more attractive than a volatile stock market.

The Asian deflationary influence also promises to keep Alan Greenspan and the the Federal Reserve from having to raise interest rates.

Low inflation, meanwhile, did little to kindle a fire under gold prices. And other commodities generally sagged. But silver looks safe. It soared on strong demand for industrial use. And unlike gold, central banks don't have reserves of silver to dump on the market.

For a strategy going into 1998, market gurus sing a different tune from a year ago. Then they favored stocks of large companies, international issues, and mutual funds that tracked market indexes.

Peggy Farley, managing director of AMAS Securities, sees the Dow at 9000 next year, as companies grow their profits an average 10 percent. But the gains will not be easy, she says. Careful stock picking is more important than ever.