Markets Reward Investors Year-End Slide Doesn’t Dampen Record Six Years Of Solid Gains

U.S. stocks plowed ahead in 1996, capping the best two years for investors since the mid-1950s.

A steadily growing U.S. economy drove up the dollar last year as well, but gave the bond market a beating, delivering an annual loss for investors. Bad news for the bond market pulled down stocks on the last day of trading in 1996, but it wasn’t enough to dampen a record six years of gains on Wall Street.

“I think we’ve had a terrific year,” said Peter Canelo, chief investment strategist at Dean Witter Reynolds Inc. “I think we’d be lucky to have half as good a year in 1997.”

Stock investors didn’t have much to complain about in 1996, as the Dow Jones Industrial Average rose 26 percent to 6,448.27 - on top of a 33 percent gain in 1995. An expanding economy in the U.S. and a slump in Europe and Japan drove the dollar 11.77 percent higher against the yen and up 7.21 percent versus the deutsche mark. Though the Dow sank 101.1 points Tuesday, it didn’t come close to dampening the best two-year advance since 1954 and 1955.

Stocks of computer and chip makers, oil companies, and financial services companies rallied in 1996, pushing the Dow to a record 6,560.91 on Friday. Intel Corp. shares jumped 131 percent to $130.9375, Exxon Corp. rose 22 percent to $98, and Citicorp surged 53 percent to $103.

Only two of the stocks in the Dow fell in 1996: AT&T Corp. and Bethlehem Steel Corp.

“It was better than a lot of people would have expected at the beginning of the year,” James Margard, a money manager who helps oversee $3.1 billion at Rainier Investment Management.

Bond investors can’t say the same, and they can blame a healthy U.S. economy for their woes.

Those who bought 30-year Treasury bonds - the benchmark of the bond market - in January ended up with a 2.09 percent loss on their investment in 1996.

“Overall it’s been a heck of a year for stocks,” said Don Hays, chief investment strategist at Wheat First Butcher Singer. “It hasn’t been too good for bonds, though.”

Treasury bond yields soared for much of the year, hitting a high of 7.19 percent July 19, as investors waited for the Federal Reserve to raise interest rates to brake an advancing economy many bet would spur inflation.

They were wrong.

The economy slowed in the fall, the Fed didn’t budge, and money managers bet rates would hold steady for some time. Bond yields retreated, settling at 6.64 percent Tuesday.

All tolled, the year produced returns that paled in comparison with 1995, when bonds rose 18.5 percent - the third-best year ever for bonds.

Tuesday was no exception, with bonds falling after news of buoyant consumer optimism and strength in housing and manufacturing spurred concern once again that a growing economy would quicken inflation in 1997.

And the specter of the Fed boosting rates in 1997 is already rattling the market.

“I think they’ll have to tighten (credit) on March 25 and maybe even sooner,” said Tony Crescenzi, head of fixed income trading at the brokerage Miller, Tabak, Hirsch & Co.

Stock investors don’t have much to worry about in 1997, as a healthy economy continues to push the Dow higher, strategists say.

Stocks will likely rise another 10 percent to 12 percent, with the Dow hitting 7,000 by midyear, said Dean Witter’s Canelo. Smart investors, he said, should keep about 65 percent of their investments in stocks.

Some investors are predicting a recovery for bonds, as baby boomers put more of their retirement money into fixed income securities and Congress moves to bring budget deficits down.