Bonds A Better Bet Than Stocks This Year Smith Barney Strategist Foresees Lower Rates

One of the top stock market strategists for Smith Barney Inc. expects bonds to outperform stocks this year.

John Connallon, whose was in Spokane to meet with investors, said 1997 will be difficult for stocks, although the first quarter should continue to be strong.

The surge early in the year, he said, will be driven by contributions to Individual Retirement Accounts that can be deducted from 1996 taxable income.

But with that money dried up, the market will have difficulty making much headway through the spring and summer, Connallon said.

He also expects economic activity to tail off, further robbing stocks of lift but giving investors a good excuse to move into bonds.

Slower growth will push interest rates lower, Connallon said. Bonds, consequently, will move up.

Anticipating the shift, he said Smith Barney is recommending investors hold 40 percent of their financial assets in bonds, the highest proportion the company has ever suggested.

They may also want to increase their cash, he said.

Connallon also looked to three other sectors to do well:

Rate-sensitive stocks. Like bonds, stocks in utilities, banks and insurance companies are likely to do well as interest rates decline and their dividends become attractive.

Health care. Not necessarily short-term gainers, but Connallon said they are bound to more higher as baby boomers demand additional medical services.

Energy stocks. Always late-market movers. Although they have rallied strongly in the last year, Connallon foresees another 15 percent to 20 percent advance.

Connallon said he is concerned about the reaction of investors if the market turns in a flat year, or one with only mildly positive results.

He questioned the fixation on aggressive growth among many who do not understand the risks that go along with the potential rewards.

After two spectacular years, Connallon said, “clients are almost blase about rates of return.”

And, finally, he noted 1997 will be the first year of a presidential term. If President Clinton has any tough economic medicine for the nation, he will probably administer the cure this year, he said.

, DataTimes