Bell Financial Management Corporation

The Federal Reserve (Fed) met on October 5, early in the last quarter of 1999. The Fed decided to leave the Federal Funds Rate (FFR), the overnight inter-bank lending rate, at 5.25%.

Wall Street would have normally viewed this as a positive event. However, because the Fed changed its bias from neutral to tighten, it set the stage for a major sell off on Wall Street in early October.

By mid October, the Dow Jones Industrial Average (DJIA) broke through the 10,000-mark intra-day, a place it had not been since March 6 of 1999.

The Stock market however, shot up like a rocket in the last few days of October. The fuel was a benign "Employment Cost Index" (ECI) report released on October 28. Adding more fuel to the fire was the announcement in the last week of October, by Dow Jones and Co., Inc., the owners of the DJIA, that four stocks would be changed in the DJIA on Monday    November   1, 1999.
Microsoft Corporation the largest capitalization corporation in the US, along with three other "new economy" stocks, Intel Corporation, Home Depot, Inc., and SBC Communications, Inc., joined the DJIA on November 1. If Microsoft and Intel had been part of the DJIA five years ago, the DJIA would certainly be higher than it is today.

As important as the new additions are to the DJIA, is the "old economy" stocks that left the DJIA. Those stocks are, Chevron Corp., Goodyear Tire & Rubber Co., Sears Roebuck & Co., and Union Carbide Corp.

The Fed met again on November 16. They raised both the FFR and Discount Rate (DR), 1/4%. Wall Street however, embraced the fact that the Fed changed its bias from tighten to neutral, and as such, fueled a stock market rally, the day of this Fed meeting. Beginning in 1999, the Fed has been disclosing at its regular meetings its bias, or potential actions in the future, along with its decision to raise or lower short-term interest rates.

The Fed in announcing a change in its bias from tighten to neutral, reassured many investors on Wall Street that the Fed would remain on hold for the rest of 1999. 

November ended on the upside for the stock market. Bonds still were range bound with yields trading between 6.1% and 6.3%, for 30 year Treasury Bonds. Bond investors focused again on the next Fed meeting on December 21. This meeting was to be the last Fed meeting until February 1, 2000.

The Producer Price Index (PPI), and the Consumer Price Index (CPI), released in early December, again showed little, if any, inflation building in the US economy.

The bond market continued to perform poorly in late December, ending 1999 with most bond classes down 5%-10% in price for the year. The fear of bond investors has been the constant rhetoric of the Fed indicating their concerns about escalating inflation for the US economy.

The stock market finished 1999, with most major indexes reaching all time highs.

No one had predicted that the meteoric performance in the stock market starting in 1995, would continue until the end of the century. This reinforces the view that stock market forecasters are often wrong about their predictions of the future direction of the financial markets.

Tech stock mania has corrupted many investors today, and has driven the NASDAQ Composite Index up to the sky in 1999.

What is certain when the stock market corrects, is that those stocks that are trading in price with no correlation to their fundamental values, will drop precipitously as investors run for cover. Many tech stocks that are trading at all time highs have never made a profit, yet investors continue to bid up these handful of stocks to unprecedented valuations. It is apparent to me as a professional money manager, that there is a limit on how high investors can bid a small group of stocks up in price, without one day experiencing a significant loss in their portfolios.

In order for the stock market to remain healthy for the future, it must broaden out and rest for awhile. If it doesn't, investors that lack the diversity in their portfolios, that best suits their specific financial needs, will have a rude awakening when the stock market turns against them.

Perhaps investors will regain their sanity in the future and select stocks for their portfolios that are trading at prices that offer investors a value for their money.

What is ahead for 2000 and beyond for the stock and bond markets, is a function of the state of the economy, coupled with the sentiment of investors. The US economy should continue to remain healthy for the foreseeable future. However, it is unlikely that the stock market will continue to offer investors unprecedented gains in their portfolios as it has in the last 5 years. That is not to say that the stock market can't continue its way upward albeit, a bit subdued.

With no recession on the horizon at the end of 1999, and if the economy continues growing until February 2000, it would set a new record for the longest economic expansion in US history, lasting 107 months.

The Fed has been reluctant to accept that the US economy can grow as robustly as it has during the 1990s, without fueling inflation.

I hope that the Fed will embrace the new economic model for the US economy created by the high technology revolution. If the Fed does not, and continues to raise short-term interest rates, the Fed risks pushing the US economy into a recession, which could be very severe.

If bonds regain their footing in 2000, it will certainly help the stock market continue its bullishness.

The key to successful investing on Wall Street, will always be to have the correct allocation of stocks, bonds and cash for your specific financial situation.

The big fear for investors may be in the past, that is, Y2K. As of early January 2000, there has been little, if any, impact as a result of it.

Happy New Millennium!