Column: Optimistic outlook for Y2K stock market

A recent study by my firm reveals that many professional money managers remain optimistic about the outlook for the U.S. stock market over the balance of 1999, despite the potential for year-end disruptions posed by the Y2K computer problem.

The poll also found strong support among managers for including personal retirement savings accounts in any congressional reform of the Social Security program.

A total of 173 portfolio managers who collectively manage more than $1.7 trillion in assets responded to my survey, conducted in August.

Responses to a series of Y2K-related questions in the survey suggest most professional managers do not expect the computer problem - also known as the "millennium bug" - to have a significant impact on the U.S. stock market.

The potential for Y2K problems stems from the fact that some older computer programs use two-digit numbers to indicate years - '99' for the year 1999, for example. These programs may read '00' as the year 1900, instead of 2000, causing them to malfunction or shut down completely.

Most managers appear relatively unconcerned. More than two thirds (71 percent) of the managers responding to our survey said they believe Y2K concerns are unlikely or very unlikely to trigger a severe correction in the stock market. In fact, 70 percent of the managers polled said it was possible that the absence of any year-end problems could trigger a relief rally in the market.

In terms of timing of any Y2K effects, almost a quarter (23 percent) of the managers said they believe the potential for disruption has already been factored into stock prices by investors. Another 41 percent believe the impact of any problems will be felt in fourth quarter 1999, while 21 percent expect them in the first quarter of the year 2000. Twelve percent said they expect no impact from Y2K, while another 3 percent said they had no opinion.

Managers' projection of their year-end portfolio weightings also confirms the overall mood of optimism about the ability of the financial markets to cope with Y2K. An overwhelming majority of managers (85 percent) indicated that compared to their present positions, they will either be overweight (24 percent) or neutral (61 percent) in stocks by the end of the year.

I see the financial services industry as being extremely vigilant in preparing for Y2K. I have found through my own research that investment managers overwhelmingly feel their systems are Y2K compliant.

Overall, money managers surveyed in August said they expect 1999 to be another good year for equities. When asked for an expected annual rate of return on the stock market as measured by the S&P 500 index, 73 percent of managers indicated they expect the market to return 10 percent or more for the year. While answers ranged from a -12 percent loss to a 38 percent gain, one quarter of the managers surveyed expect the market to return more than 14 percent. Only seven percent of those polled expect the market to return less than five percent. The average expected return on the S&P 500 for 1999 was 11 percent - roughly equal to the index's long-term average.

I feel that investors need to set their expectations realistically and be aware that the tremendous gains we have enjoyed over the past few years have far exceeded what reasonably can be expected on a long-term basis.

Managers were divided on the outlook for the stock market's major economic sectors. Almost one-third of those surveyed (32 percent) predicted that technology would be the best-performing sector for the coming months. Another 14 percent picked energy, while seven percent selected financial services. Interestingly, 23 percent of the managers predicted that technology would be the worst performing sector for the following six months, followed by energy (11 percent) and financial services (12 percent).

When asked if they intended to own more of fewer Internet stocks by the end of this year compared to 1998, 13 percent of the managers surveyed replied that they expect to own fewer, while 61 percent said they expect to own none.

I think that investors should note the reticence of professional money managers to invest in Internet stocks. Internet companies have proven the glamour stocks of recent years and their sudden run-ups and sell-offs are frequently based on emotion rather than sound financial principles.

Professional money managers are often successful because they adhere to strict disciplines designed to help investors avoid the risks associated with volatile stocks. So it's not too surprising that they remain skeptical about many Internet stocks.

In terms of the outlook for the major global markets, respondents continued to be optimistic about the outlook for Japanese and U.S. equities. When asked to cite the best country to invest in for the coming six months, Japan (23 percent) led the list, followed by the USA (11 percent). No other country earned more than three percent of the vote.

Opinions were more varied on the worst country for investors. Although Russia earned the distinction as worst country, it garnered only 13 percent of the votes.

Social Security reform earned overwhelming support in my study, although managers were split on the question of whetherCongress will create some form of personal savings account system to supplement Social Security benefits for future retirees.

A decisive majority of managers surveyed (85 percent) said they favored the creation of some kind of personal savings account as part of any reform effort. However, nearly half (49 percent) believe this will not happen.

I got this data from Salomon Smith Barney, which conducted this survey via a faxed questionnaire distributed in August to approximately 1,300 investment managers. Responses from 173 managers were received and tabulated. For information, call me, Bill Creekbaum, CFP at 689-8720.

William Creekbaum, MBA, CFP, a Carson City resident, is vice president-investments of Salomon Smith Barney, a financial services firm serving Northern Nevada.