Red-Hot Stock Market Expected To Cool Off Next Year
Corks popped all year as U.S. stocks set one record after another.
Next year investors may be left with a hangover.
A string of profit warnings from Cirrus Logic Inc., Alliance Semiconductor Corp., Cyrix Corp., Michaels Stores Inc. and Tekelec this week suggested that 1995’s spectacular profit growth is petering out.
“We’re going from an A year to about a C,” said Edward Riley, chief investment officer at $15-billion endowed Private Bank, a division of Bank of Boston that invests for wealthy individuals. “Clearly slowing economic growth is taking is toll on a lot of companies’ earnings.”
Strong profit growth helped the S&P 500 notch 76 highs and rocket 33.6 percent this year. The gains mark the index’s best performance since it returned 38.1 percent thirty-seven years ago.
Riley said stocks will be lucky to gain 10 percent in the next 12 months - in line with the market’s average annual return since 1926.
This week, major national indicators limped past the finish line. The Dow Jones Industrial Average, which surged 33.5 percent in 1995 - it’s biggest percentage increase since 1975 - managed a 0.4 percent increase to 5,117.12. The Nasdaq Composite Index, which includes Intel Corp. and Microsoft Corp., rose 0.5 percent, or 5.25 points, to 1,052.14 for the week, chalking up a 39.5 percent increase for the year. The Standard & Poor’s 500 Index added 3.97, or 0.6 percent, to 615.93 for the week.
The market’s tepid finish was partly due to concern that fourth-quarter earnings fell short of Wall Street’s expectations and that the disappointments are spilling over into next year.
Cirrus Logic, for instance, rattled investors of semiconductor issues Thursday, when it trimmed its earnings forecast for the quarter ended Dec. 31 by as much as 71 percent - it’s second revision in two months.
“The economy has clearly slowed, and companies need to adjust to a slower rate and that means some disappointments,” said Philip Tasho, chief investment officer at Riggs Investment Management Corp., which manages $500 million.
Among the companies that are expected to report earnings next week are Acclaim Entertainment Inc., maker of video game cartridges, Software maker Adobe Systems Inc. and brokerage firm Lehman Brothers Holdings Inc.
Car companies Ford Motor Co., General Motors Corp. and Chrysler Corp., will release their December sales on Thursday. These figures are particularly sensitive indicators of economic activity.
To be sure, the prospect of lower rates could temper the bout of fourth-quarter earnings reports in January, money managers said.
“As rates move down, that will spur economic activity eventually” and revive profit growth, said Tasho, who expects the Dow industrials to reach 5,600 by the end of next year.
Meantime, hold onto drug and food companies whose earnings tend to be steady no matter what the economy does, said Riley. “It’s best to stay with those companies that have less susceptibility to go down with the economy.”
Managed health-care providers Oxford Health Plans Inc. and Pacific Physician Services Inc. will do well as more companies switch to HMOs next year, said Brian O’Connor, money manager at Roanoke Asset Management, which oversees about $290 million in assets.
Airline stocks could also be high-flyers. So far this year, the America Stock Exchange Airline Index soared 95.8 percent. UAL Corp., parent of United Airlines, was raised to longterm “buy” at Merrill Lynch & Co. Friday. The shares doubled this year.
Semiconductor, computer and software companies - this year’s market leaders - will be riskier as evidence of slowing personal computer sales signal there may be trouble ahead, traders said.
xxxx NO YEAR-END LISTINGS The Spokesman-Review will not publish year-end stock listings this year. Those who would like a complete guide of how stocks fared in 1995 might consider the Wall Street Journal’s year-end investments issue. That issue will be published Friday and will be available in newsracks and newstands around Spokane.