1. Early in the year, the powerful pace of the global and U.S. economies and stock markets creates an enormous demand for capital. Partly because of a weaker dollar, the long U.S. Treasury yield exceeds 7.5%, further straining excessive equity valuations.


Starting in the spring, the

Federal Reserve

commences a monetary tightening that increases short-term interest rates by more than 100 basis points by year-end to slow the economy, as inflation again begins crawling higher. This tightening, combined with high valuations, starts a stock market slide that carries the

Standard & Poor's 500

down 25%, where it remains for several months. The linkage between stock performance and bond yields becomes evident once again, and pressure increases for strategists to raise the risk premiums in their models.


In a national shift of focus toward integrity and character, the Democrats nominate

Bill Bradley

and the Republicans nominate

John McCain

for President. Bradley wins, and the Democrats achieve a majority in Congress.


The Internet finally meets its Waterloo. A movement gains support in Congress to charge a national sales tax on Internet transactions, which would be allocated to the states. Online users complain about slow speeds and the disappointing performance of some companies. Delivery bottlenecks from e-tailers trigger buyer resistance. There is a graduated carnage in technology. Some Internet content and retailing stocks correct by 50%, and access providers come down by a third. Personal computer and other hardware companies with current earnings decline only 25%. While the Internet continues to be viewed as the most powerful business phenomenon in our lifetime, the stocks were discounting a profitability reality that was unlikely to come true.


The price of crude oil moves above $30 and stays there as growth throughout most of the world exceeds expectations and supply remains under control. Israel and Syria sign a peace pact. The political problem in the Middle East becomes the conflict between the deprived Islamic world and the perceived exploitative West. This is the force holding the

Organization of Petroleum Exporting Countries

together. Oil service stocks rally.


(HAL) - Get Report



(SLB) - Get Report

($56) and

Smith International


($50) have big gains.


After a number of dismal years, hospital management companies finally become strong performers. Conflicts with the government are reversed as legislators view these operations as part of the healthcare solution rather than as part of the problem. Columbia HCA


($29), Tenet

(THC) - Get Report

($23) and Health Management Associates


($13) do especially well.


Restructuring proves to be the cure for Eurosclerosis. The European economy surges by 4% in 2000, and the foreign-exchange value of the euro soars, hitting 1.25 against the dollar during the summer.


In contrast, restructuring backfires in Japan. The economy slips back into recession because of high unemployment, low consumer spending and weak capital outlays. Disenchanted foreign investors sell Japanese stocks, driving the


back below 15,000. Panicked Japanese repatriate their overseas investments, and the yen/dollar exchange rate goes to 80, helped by Japan's large trade surplus.



Russell 2000

outperforms the S&P 500 by rising more at the beginning of the year and declining less later on. New leadership sectors appear as commodity prices continue to move higher and intermediate materials stocks deliver better performance than the indexes. Active managers beat the market for the second year in a row.


Several significant secular trends can now be viewed more positively, providing the basis for new investment themes: (a) The dangers of global warming have been overstated, (b) biotechnology breakthroughs will extend the life expectancy for those under 40 in developed economies by two years, and (c) computers and the Internet begin to revolutionize the classroom at all levels.

Source: Morgan Stanley Dean Witter

Technology Research/News, Jan. 3, 2000.