We seem to be having the usual year-end stock rally. But will we wake up after New Year's Day with a hangover?
Most economists think not. Business is still booming, which suggests another modest interest-rate hike, sometime during the next six to nine months, says economist Allen Sinai, president of Primark Decision Economics in New York.
"But by cooling things down, the hikes will preserve the expansion," Sinai says. "It's still a great equity bull market. It just won't rise as much as it did in the past."
Bond-fund managers have been shouting and waving their hands, trying to attract your eye. "High-yield bonds are very cheap," says Theresa Havell of Havell Capital Management in New York. She thinks that total returns could reach 15 percent to 18 percent next year. As for tax-free municipals, "they're so cheap they're a giveaway," she says.
Still, it's hard to interest investors in bonds once they've sampled the thrills of growth stocks. Jeremy Siegel, finance professor at the Wharton School in Philadelphia, sees no end to their dominance.
Growth stocks have high and rising earnings and sell for high prices, relative to their earnings. Value stocks, by contrast, sell for low price/earnings ratios, and often are companies in trouble. In the 1970s and early 1980s, value stocks trounced growth. Then growth took over and never looked back.
Growth investors go wrong, however, when they try to pick a small handful of winners, Siegel says. You might wind up with too much Coke and too little Lucent (or the opposite, when their relative market performance turns).
He also counsels against stocks with P/Es over 75, which currently include Cisco Systems, Sun Microsystems, Yahoo! and AOL. High P/E stocks that can't keep delivering staggering gains in earnings (or any earnings at all) eventually get beaten up.
The best growth-stock strategy? Buy a well-diversified mutual fund, Siegel says. One good candidate: the Vanguard Growth Stock Index Fund, which is the growth half of Standard & Poor's 500-stock index (the Value Stock Index Fund is the other half).
So far, the growth fund is up 15.2 percent for the year, compared with 8.5 percent for the value fund.
There's one other group of fund managers shouting for your attention: those who shop abroad. "Sell the Dow, buy the emerging markets," says George Foot, managing partner of Newgate LLP in Greenwich, Conn., and a specialist in closed-end funds (those are funds that trade on stock exchanges).
Money has been flowing out of emerging markets funds all year, due to Y2K. Yet the Pacific funds, not counting Japan, are up 41 percent since January. "The region is in the early stages of a long bull market," Sinai says.
Japan funds, for that matter, are up 84 percent on constructive financial reform and solid growth, says Adam Posen, senior fellow at the Institute for International Economics in Washington, D.C. Europe has a growth story, too. For a decade, we've focused on U.S. stocks. In the '00s, it may be the internationals' turn.