Not that Will Rogers had anything against economists. He figured their guess was as good as anybody else’s. This year’s consensus guess: moderate slowing sometime this winter–not enough to hurt the economy but sufficient to hold down inflation and interest rates; faster growth later, and nifty profits, thanks to stronger demand and lower costs of doing business. Some industries are still struggling–among them airlines and defense. California remains in a hole. But the mountain of private debt built up in the ’80s has pretty much been restructured.
The weakest point remains jobs. Although new jobs are being created, they’ve been offset by layoffs as corporate downsizing persists. The quiet struggle of underemployed youth and middle-aged managers isn’t over yet.
“In theory,” says Allen Sinai, chief economist for Lehman Brothers, “this painful retrenchment should lead to higher economic growth, higher real wages for those at work and, ultimately, many more jobs.” Note those words, in theory. America has been running an experiment, on the backs of a generation of laid-off workers. to see if restructuring can restore the country’s former rate of income growth. If this experiment works, Sinai says, a distinct drop in unemployment should show up by 1995. That means one more dicey year.
Some investments that these views suggest:
For one-year money, skip CDs at only 3.2 percent. Series EE Savings Bonds pay 4.1 percent for one year and you owe no state or local tax on the interest.
To an ’80s eye, last year’s big gains in gold funds (up 77.1 percent) and real-estate funds (up 20.2 percent) imply a belief that inflation will jump. But even if it doesn’t, these stocks have a story. For gold, tremendous demand is flowing from new-money centers in Asia and Latin America, displaying local fears of currency breakdowns. For real-estate stocks, the buying is now led by mutual funds and other institutions. Values on most commercial properties touched bottom within the past two years (office buildings remain an exception), apartment rents have turned up, cash flows are improving. Martin Cohen, manager of Cohen & Steers Realty Shares, expects well-managed real-estate investment trusts to yield investment returns in the high teens for the next three to five years.
Average home prices mask huge differences from neighborhood to neighborhood. Luxury homes are still pretty flat. while some lower-priced houses have been moving up. Among today’s strongest markets, showing price gains of 8 percent or more: Ft. Myers, Fla., Portland, Ore., Tucson, Salt Lake City, Albuquerque, Philadelphia, San Antonio, Austin and Tacoma, Wash. Among the worst: Hartford, Los Angeles and San Diego.
The case for foreign securities remains exceptionally strong. In Mexico, you’ve got NAFTA, falling interest rates and the spurt in government spending that precedes elections. In Continental Europe, falling rates can raise prices on both stocks and bonds; they’ll probably outdo the American markets for several years, says John Ballen, manager of the MFS World Growth Fund. In East Asia, the story remains brute growth, fed by an avalanche of money from American mutual funds. “These markets are small, so it only takes a small amount of U.S. money to move them,” says Mehran Nakhjavani of the Montreal-based Emerging Markets Analyst. That suggests a plunge if Americans lose their appetite for the Pacific Rim–although those stocks now attract Japanese money, too.
Emerging countries will be the GATT deal’s biggest winners, Nakhjavani adds. They depend more on trade than other countries do, and GATT gives them access. Taiwan, South Korea and Argentina look under-valued; Brazil, Turkey and the Philippines could be disasters waiting to happen. But that’s why you own a mutual fund: to let your manager decide.
A few years ago adventurous investors held 5 to 10 percent of their money abroad. In the past few months, that has risen to 40 or 50 percent–“a remarkable shift, which at some point could be a negative for the U.S. market,” says Ralph Wanger, manager of the Acorn and Acorn International funds. In November some 28 percent of the new money streaming into stock funds went abroad.
The double-digit gains of recent years are probably finished. Bonds should be pretty safe but will offer uninspiring returns, predicts Gerard MacDonell of the BCA Interest Rate Forecast. Best buys: municipal bonds, whose tax-adjusted yields are unusually high relative to Treasuries; and high-yield (junk) bond funds, which paid average Yields last year of 9.3 percent.
Last year’s investment results plainly show the value of diversification (chart). Investors in mainstream, big-company stocks might have earned double-digit returns had they kept some money in, say, small-company and real-estate funds.
But look to your defenses. Stocks are now in their longest-ever up-trend without so much as a 10 percent correction, says Smith Barney Shearson’s top technical analyst, Alan Shaw, who believes that such a downturn lurks. That doesn’t mean dump stocks. But avoid margin loans, swear off frothy new-stock offerings and diversify abroad. If the market faints, wait till next year. Ever since 1885, years ending in 5 begat markets that went up.
No one got rich on CDs or houses in ‘93. Mainstream stocks and bonds did well, but speculators took the Prize.
INVESTMENT 1993 RETURN One-year CD 3.5% Existing homes* Northeast 2.0% Midwest 3.9 South 4.0 West 1.0 Mutual funds^ Gold 77.2% International 38.0 High-yield bond* 19.1 World bond* 15.7 Small-company growth 13.6 U.S. government bond* 10.5 S&P 500 index funds 9.7
*12 MONTHS ENDING NOVEMBER.
^DIVIDENDS REINVESTED.
SOURCES: BANK RATE MONITOR, NATIONAL ASSN. OF REALTORS, LIPPER ANALYTICAL SERVICES
