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Steady growth, slow inflation likely in new year

Posted online

by Jack Lantis

for the Business Journal

There were plenty of financial fireworks in 1997, but not all of them shot upward. The Dow Jones Industrial Average was poised to post another solid annual increase, yet it sustained several triple-digit losses.

Last year also saw the Dow's biggest daily point gain and biggest daily point drop.

Consumer Price Index levels showed little inflation, and the Federal Reserve maintained a neutral stance on interest rates.

So, what may the stock market and economy hold for us in 1998? Here's one set of perspectives:

?The economy should grow slow and easy. A number of economists forecast that the real gross domestic product (GDP) growth, which measures the increase of products and services produced by U.S. companies, should rise about 2.3 percent this year compared to an approximate 3.7 percent increase in 1997. The recent financial turmoil in southeast Asia is one reason why the U.S. economy's growth could stay restrained.

?Inflation could go up, but not much. Despite slower economic growth, wage increases stemming from a continued tight labor market could provide some modest upward pressure on the inflation rate. This anticipated rise in wages could lead to a slight uptick in the inflation rate (as measured by the Consumer Price Index) in 1998 to 2.8 percent, compared to the approximate 2.4 percent inflation rate for 1997.

?Interest rates should stay at bay. Despite an expected minor boost in the inflation rate, slower economic growth in 1998 should keep any possible short-term interest rate increases small. A softer economy later in the year accompanied by surprisingly weak inflation might even inspire the Fed to make a small reduction in short-term interest rates.

?The economy's history favors the financial markets. In both 1993 and 1995, the U.S. economic growth rate softened, but then increased again in the following year.

In both of those years, the U.S. Treasury and stock markets were higher at the end of the year than at the beginning. While past performance can't guarantee future results, a similar market scenario is possible should the growth-softening in 1998 prove to be temporary.

?Stocks should still forge ahead. Several stock market experts believe the combination of slow but steady economic growth and low inflation provide the "best of two worlds" for the stock market. They expect the Dow to reach all-time highs between now and mid-year.

Recent instability in stock markets overseas, combined with attractive U.S. corporate earnings growth, could result in more investors flocking to the U.S. stock market in search of solid, stable companies in the first half of the year, which could be good news for large-capitalization stocks.

If concern about the economy fades, however, investors may want to consider small-capitalization companies, as they could offer greater return potential. Keep in mind that small companies' stock prices generally are more volatile than those of large-company stocks.

Overall, you may want to consider stocks of companies whose fortunes are typically less dependent on the economy's performance. Among the industries that are expected to see favorable results in 1998 are consumer nondurables (i.e. household products, foods, beverages, cosmetics), international oil producers, electrical equipment and life/property insurance.

(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in Springfield.)

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