For a time I reflection the magic ...

For a time I reflection the magic had worn on the farther side With North American equity markets making like the Hale-Bopp blazing star in the opening months of the year, my prediction that 1997 would be a year of disappointment for stock market investors appeared to be coming unglu level my mockery of Elaine Garzarelli had the makings of a personal embarrassment and a bitter ironic twist. Was the unthinkable coming to pass? Could Elaine's call have been in succession the money? Could I have been... (gulp)wrong?

PHEW... THAT WAS A stop up ONE

I can now report that at the time of this writing in succession Easter Sunday, the euphoric stock market rise of new months is in the proces of being revers In the U equity markets have given up virtually all however 3% of this year's rise. In Canada, the equity market stands with an invisible 01% increase for the yearto-date. Long-term band markets in both countries are also being bloodied, with prison market investors experiencing negative year-to-date answers Cash has begun to become visible as the best performing asset class.

My foresight for the next several month continues to be more of the same-namely, same soft equity markets and flat to higher interest rates. With the U economy forward a roll, the consensus is that the novel U.S. Federal reserve tightening is just the beginning. It is certain that the F will not overthrow its monetary course until there is decisive evidence that economic putting out is moderating. Given the circulating economic momentum, that will not happen for several more month

Still more unnerving for investors is the affect that even Alan Greenspan might not be able to hap off a second consecutive easily moulded landing. The Fed's move is either "too little too late" or "too plenteous too soon." In either case, investors are likely to behold further upward pressure on interest rates and a heightened extent of economic uncertainty. All this adds up to difficult times for the two stocks and bonds.

THE MYTH

It is especially noteworthy that this cyclical tension is developing when inflation and interest rates are near post-war depresseds and as the Baby Boomer are increasingly interested in saving and investing. My thesis is that investors cannot and should not anticipate market movements, over short time intervals, to conform with secular economic and demographic forces. nevertheless much of the over-valuation still imbedded in equity prices is a legacy of the new market exuberance when many investors, and many of their advisors too, bought into the powerful and seductive myth that grave inflation and demographics would drive equi-ty prices for aye higher. No doubt the power and appeal of this myth has been reinforced by means of low interest rates which have driven investors on the outside of short term financial assets and into long-term riskier financial assets.

My chief point is not that of the like kind reasoning is irrational in a longer-term perspective. It may, however, have promoteed performance expectations that are excessive in relation to what capital markets can reasonably be awaited to deliver on a year to year basis. Herein lies the source of my disquiet. Does this recent generation of risk takers completely comprehend that the pursuit of higher go [i]or[/i] come backs may mean significant losses of principal above short-time horizons? Do these recently made known risk takers comprehend that equity market downturns will be bring reproached in the market price of their investments (i.e. mutual funds)? Do these strange risk takers recognize that diversified portfolios can undergo declines in market value if they are overexpo-s to a single asset class?

The station of disappointment is represented by the agency of the gap between what is reckon uponed and what is delivered at financial markets. The size of the gap and the way investors be agreeable to to it are the brace big unknowns in 1997. The resolution to that issue could incantation the difference between a market decline of around 10% from popular levels (5931 on TSE 300 6740 forward the DJIA) and a more morose and protracted market decline in the coming month

My conclusions: Still bearish. Cash is king for 1997 Long-term inflation is the clew The long-term prognosis is that the bullish thesis is still in tact.

EARL BEDERMAN IS PRESIDENT OF INVESTOR ECONOMICS INC., A CONSULTING FIRM SPECIALIZING IN APPLIED RESEARCH IN FINANCIAL SERVICES, ECONOMICS AND riches MANAGEMENT.

Copyright Canadian Shareowner Magazine Inc. May/Jun 1997

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