Can It Go On Like This?

As the stock market climbs to ever-greater heights, investors are becoming more anxious about where to put their dollars. To find out what leading market strategists are telling their clients, BUSINESS WEEK inaugurated its first annual survey of the top stock market strategists and chief investment officers at the nation's leading securities firms.

The debut of BUSINESS WEEK's market forecast survey found strategists taking a decidedly cautious stance. They expect, on average, a gain of just 5% for the Dow Jones industrial average in 1996--about half its average growth per year over the long term. The hot sectors in 1995--technology, financial, and health-care stocks--are still expected to beat the broad index, say the strategists. But this year's wallflowers, such as energy, consumer staples, and gold, are gaining fans.

"RISKY BREW." Strategists are skittish about forecasting 1996's market. "The year is a wild card," says David B. Bostian Jr., investment strategist and chief economist for New York-based Herzog, Heine, Geduld Inc. He cites a "risky brew...of uncertainty about fiscal and monetary policies in Washington, weakness in the debt-encumbered consumer sector, and the beginning of that most volatile of all pe- riods--a Presidential election in both the U.S. and Russia." He thinks the Dow could drop to 4,700 by midyear and end 1996 up just 2%. On average, strategists recommend having 61.5% of one's portfolio in stocks. Bostian, however, is telling investors to begin the new year with just 40% in stocks--and 25% in cash.

Another prominent bear is Oppenheimer & Co.'s E.Michael Metz. He thinks the Dow will be at 4,805 a year from now and recommends starting 1996 with 40% in cash. Metz expects inflation to rev up in 1996. His favorite sector? Gold. Metz thinks that lower short-term interest rates worldwide will lessen the opportunity cost of holding gold and stem selling by central banks.

A handful of strategists foresee double-digit gains for the Dow. One is Dain Bosworth Inc.'s Robert F. Dickey, who looks for a 22% gain. "I see no evidence that the long-term market is making any kind of final top," says Dickey, although he expects a sell-off in coming months: "We'll have a quarter of pain, and then the market will start back up with a vengeance." Dickey, who recommends keeping 70% in stocks, expects the action to be in small-cap growth stocks. He thinks the NASDAQ Combined Composite index will rise 35%.

Even strategists forecasting a tough investment environment see plenty of opportunities. "Energy could be a big surprise," says Natwest Securities Corp.'s Peter J. Canelo. "I think the production of oil is at a maximum and demand will be stronger." According to David Shulman of Salomon Brothers Inc., "investors will begin to realize that a secular upswing in oil field capital spending is under way." Anthony F. Dwyer of Josephthal Lyon & Ross Inc., who expects a big sell-off in the second half of 1996 from a Dow that rises to 5,900 at midyear, likes the energy group, especially offshore drilling rig contractor Global Marine Inc.: "As the market nears a peak, energy is usually the last sector to move up." Still, strategists' clear favorites are computer and electronics stocks.

Last year, the pundits were also down on the market. And as a result, many of them missed mut on one of the greatest bull markets in history. After such a dazzling run, hedging one's bets is a strong temptation. But as 1995 clearly showed, not being in the market can cost a pretty penny.

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