Despite a tumultuous year in the stock market, brokers in Baltimore are in an upbeat mood, calling 1998 one of their best years ever, and they believe this year could be just as good if the economy holds up.
"The conditions and environment the market is operating in are as near to perfect as you can get," said Charles W. Shaeffer Jr., principal of the Shaeffer Investment Consulting Group of Wheat First Union in Baltimore, which manages $450 million. "There is plenty of fuel to keep the market going as long as they [investors] perceive that there is no place to go."
An expanding economy, low inflation, high consumer confidence and a continuous flood of money into securities makes conditions ideal for a strong stock market this year.
"The mood is very good right now," said Morry Zolet, senior vice president of investments at Ferris Baker Watts Inc. in Baltimore. "People are very happy; their accounts are higher than they were before."
'Mountain of cash'
If stocks keep rising as they have been, brokers expect money to continue pouring into the market this year. Investors, who were frightened away when the market plunged in August, September and October, will find a rising stock market too attractive to pass up, the brokers said.
"There is an immense mountain of cash still on the sidelines," said James A. Kujawski, a broker at Prudential Securities Inc. in Baltimore. "In my opinion, it is probably going to find a home, probably in the near term."
The euphoria among brokers has been nearly constant for the past four years, as the market has marched higher. The Dow Jones industrial average, a closely watched barometer made up of 30 blue-chip stocks, rose more than 16 percent in 1998, 22 percent in 1997, 26 percent in 1996 and 33.5 percent in 1995.
But while they are upbeat, brokers are concerned this year about a number of issues that could cause the stock market to fall and investors to flee.
Among them is the health of Asian countries, primarily Japan, the world's second-largest economy, which is struggling to shore up its ailing economy and reform its troubled banking system. Brazil is another potential problem because its economy is also troubled, and, as the ninth-largest economy in the world, it is a key U.S. trading partner.
If problems with these countries persist, brokers fear that U.S. corporations this year will face tougher competition as prices on foreign exports are slashed and markets for their products dry up. As a result, profits could fall, layoffs soar, and stock prices dive.
"I think the markets could be rattled by that," Zolet said.
Increased volatility is another concern going into 1999.
Investors were driven from the market last summer when the Dow plunged 512.61 points Aug. 31. The drop took the index down to 7,539.07 points, marking a 1,798-point decline from 9,337.97 July 17.
Brokers expect similar large swings this year because the stock market is at such high levels. Kujawski is worried that problems in Asia, which erupted in late 1997 when the currencies of several countries plunged against the dollar, could again surface and shock the market.
"I think the volatility is here for a while," Kujawski said. "But more than not, investors have gotten used to the fact that the market has got some volatility."
Many brokers expect the market to continue to climb during the year.
James M. Hodges, branch manager of Legg Mason Wood Walker Inc.'s Towson office, is one, and he says his biggest problem going forward will be to reduce his clients' expectations on returns in their portfolios.
"I believe you are going to see returns come back to the norm, 9 [percent] to 11 percent, rather than 18 percent returns or 20 percent returns," he said.
The message may fall on deaf ears because investors' expectations are already running high in 1999. The expectations have been fueled by huge runs in Internet stocks, such as online bookseller Amazon.com Inc. and America Online Inc., and in many popular big company stocks.
This has made brokers uneasy, who say investors are ignoring fundamentals and are playing the stock market like a slot machine.
"The Internet stocks are off the wall," Shaeffer said. "While I don't see the glass as half empty, I have a lot of cautionary thoughts. The market by any standard is not a cheap stock market."
But Shaeffer and the other brokers say it is hard to beat the market, especially when the economy is rolling, interest rates are low, and investors keep pumping billions into stocks.
"I just don't know what is going to happen two weeks from now, or three weeks from now," Shaeffer said. "Unless we have some fundamental change in our system, the stock market is still a very good place to be."
Pub Date: 01/24/99