11/02/99

The Changing Stock Market

The stock market has been volatile over the last several months. Overall, the 1999 market year has been quite different then the surging markets we have grown accustomed too throughout much of the 90’s. Not only has the market slowed, it has changed in various ways. In this article, I want to explore this changing market and discuss ways in which you might want to review and perhaps fine tune your investment portfolio.

Your Asset Allocation -- This article is written from the perspective that you want to have your portfolio wisely allocated across certain investment classes. I believe that in view of the changes in the stock market, you may want to add new asset classes and/or pare back certain classes at this time. Please note that I am not offering specific investment advice, I am simply attempting to point out some of the changes in the market and, based on these changes, suggesting you take time to reassess your investment positions. Having done so, you might draw new conclusions about how your portfolio should be allocated.

Large Cap Stocks/Funds -- One of the biggest changes of the 1999 market over many of the previous years has been the declining growth of many large cap stocks. Some market analysts have been predicting for years that the large caps (total value of outstanding shares of $5 billion or more) could not continue their exceptional rate of growth and that the market would turn to mid- and small-cap stocks. Broadly speaking, those predictions fell short until 1999 when the pendulum has clearly begun to swing the other way. As this pendulum swings, it is a good time to review your portfolio and calculate how heavily invested you are in large-cap domestic stocks and stock funds. It has been my experience that many people concluded the decade with an overbalanced portfolio in this arena. While an overbalance in this asset class proved advantageous for many years, it could be less so if the pendulum continues to swing the other way.

A part of the overbalance in large caps rest in the assets held in S&P 500 Index funds. Many investors flocked to these funds in the ‘90s, using retirement plans and regular non-retirement accounts. These funds, along with the popularity of large-cap equity income funds, have left many individuals with a significant percentage of their investments in this asset class. While I am not advocating the abandonment of large cap stocks/funds nor index funds, I do think it may be wise review your portfolio and determine if you may be overbalanced in this area.

Growth vs. Value -- many people became growth-oriented investors in the '90s and they were right on target -- growth stocks/funds outperformed value-based investments. In the move towards growth, many investors now have portfolios with only a small percentage, if any, in value-based investments. As the market changes, I believe it is a good time to review your growth positions and perhaps draw new conclusions about the need for value based stocks and/or mutual funds. As the market changes, it may be prudent to recapture some balance toward value investing.

Small- Mid-Cap Stocks/Funds -- as the market has swung away from large caps, we have seen the mid- and small-cap stocks/funds begin to benefit. Many investors stayed away from these investments classes or kept their allocations relatively low over the last several years. I recommend that you review your portfolio and assess your balance in these areas. If you are underbalanced here, you may have missed some of the stronger gains of 1999 and may continue to miss out in the years ahead.

International -- for years and years, it seemed no one would be without at least one international fund in their portfolio. In fact, many advisors recommended always having a certain percentage of one’s portfolio in international -- non-U.S. -- investments. However, the rapid decline of the Pacific Rim economies in 1997 and the correlating losses experienced by many investors took them away from the international marketplace. While all the economic news is not rosy in Asia and Europe, some believe these economies are on track for a rebound. Already we have seen substantial growth in certain sectors, Japanese Small Cap stocks/funds for example, as well as many good to very good returns in international funds in 1999. If you abandoned this asset class or dramatically reduced your holdings throughout the late '90s, it may been time to look in this direction for potential growth opportunities.

Technology -- It is no secret that this sector has been a driving market force and showed considerable gains in both ‘98 and ‘99. Many market prognosticators believe that this sector will continue to shine over the long run. This makes common sense as well, given the rapid changes in technology and surge of the Internet providing growth opportunities for many companies. My concern is with the investors who have moved their portfolios almost exclusively to this sector and with those who still have not incorporated any technology into their portfolios. If you are in either one of these categories, I suggest reexamining you positions. Perhaps you should scale back if you have gotten overbalanced and, alternately, you should consider getting into this sector if you have not yet done so.

The Next Hot Sector -- Could any sector be as hot as technology has been lately? By today’s perspective, it is hard to imagine. However, good investors are always looking for the sector that is about to take off and not just piling on the sector that is hot. Are you looking for a sector that is depressed or offers the potential for significant future growth? Are pharmaceuticals or financials ready for a rebound? What sectors look good in an potentially increasing interest rate environment? It is always a good time to look for the next great opportunity.

The Bond Market -- another notable trend in ‘99 has been the tough times in the bond market. If you are an income investor, you may want to look at alternative ways to generate income from your portfolio.

In Summary -- There are, of course, numerous other ways to look at today’s market. For example, timing is a key issue today -- is this a good time to get in, or is it better to wait? The main consideration however is to step back and take a solid look at the market changes that might affect your holdings and could generate better returns in the years ahead. The shifts in the market clearly suggest one thing -- it’s a good time to reassess.

Please send questions or comments to dcoffin46333@wradvisors.com.