Returning To Earth Isn't So Bad

Despite a rough six months, promising investments abound

So you thought investing was easy. Five years of 20%-plus gains in the Standard & Poor's 500-stock average, powered by the economy that could do no wrong, conditioned millions of investors to believe that no bet on U.S. markets could ever go awry. Well, the past few months have taken care of that rosy scenario. The bubble in technology stocks burst in March and leveled market averages almost across the board. Experts from Wall Street to MIT are talking about "reversion to the mean"--the disheartening notion that investors who have feasted on double-digit rewards now face a famine of subpar returns for the next several years. Suddenly, investing looks like the tough challenge of spotting elusive winners and juggling risks that you always heard it was back in the old days--say, 1994.

We're here to help. The more than 30 pages of Business Week's Midyear Investment Outlook will serve as your road map to the scores of opportunities that still await, even in a slowing economy. We've canvassed traders, money managers, and analysts around the world to pick out the most promising investments.

Is it a bleak picture? Hardly. Our forecasters still have faith that Captain Greenspan can pilot the economy to a soft landing, grounding inflation without having to throw the engines into reverse. If the Federal Reserve chairman can continue to negotiate the hazards in his path--chief among them the wealth-driven spending of exuberant investors--growth in the U.S. should settle smoothly from its recent 6% pace to around 3% in 2001. Even with a slowdown, corporate profits have enough momentum to post double-digit growth rates through the rest of 2000. And thanks to last spring's technology crash, the market's gains are broader, with nearly 40% of the S&P 500's industry groups showing strong improvement since March (page 209.)

BACK TO BASICS. But there's no denying that it will be tougher to find investment profits. Now's a good time to return to the basics: If you've been socking money solely into large-capitalization tech stocks, start with a short course on the benefits of asset allocation and rebalancing.

One of the best ways to diversify is to look overseas for your next hot investment. Europe's prospects are brightening, and a merger wave there is creating opportunities for investors who pick their stocks carefully. East Asia's economies, excluding Japan, are growing strongly, creating good plays among the region's information technology and telecommunications leaders. But be warned: Overseas markets, especially the bolsas of Latin America, can still be heavily swayed by a U.S. slowdown.

If you don't see a safe haven anywhere in equities, you'll want to look hard at switching into bonds. Risk-averse investors will be delighted that some of the best returns can be found at the shorter--and safer--end of the maturity spectrum. If you're really eager to put your money on the bear, check out our list of the stocks that short-sellers love to hate.

More likely, you're looking for cautious ways to keep playing U.S. stocks. Analysts say that shares in energy producers, military contractors, and consumer-goods makers--particularly brewers, cosmetics companies, and manufacturers of generic drugs--could be the best defense against a slowing economy.

What about tech stocks? No matter how it's been battered, technology is one sector that no investor can overlook. Sound, profitable tech companies aren't bargains, but they should produce earnings growth to justify their share prices. Besides, technology now accounts for a quarter of the growth in the U.S. economy--impossible to exclude if you're pursuing a balanced approach to investing. And if the travails of the six months just past have taught you anything, it's that balance should be your watchword as you take your investments into the slower economy ahead.

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