U.S. Investors Plan New Year Party After Y2K Hangover

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U.S. Investors Plan New Year Party After Y2K Hangover

Updated 5:58 PM ET December 2, 1999

By Marjorie Olster

NEW YORK (Reuters) - U.S. markets could be in for a big New Year's bash after a Y2K hangover if investors dive back into the risky investments they have shunned for fear of century-end computer problems.

Some money managers say they will remain cautious in the run-up to Jan. 1 by holding extra cash or other investments perceived as safe bets.

But if the change to the year 2000 creates few hiccups, they expect it to unleash pent-up demand for riskier assets and lead funds to beef up allocations for stocks and higher-yielding debt securities, such as junk bonds.

U.S. fund managers expect the first relief rally of the new millennium to begin almost as soon as investors are assured their computers and telephones still work.

That could add a serious kick to the "January effect" -- seasonal factors that tend to boost markets in the first month of the year due to increased flows into pensions, bonuses and reinvestments of coupon payments.

"Coincidentally, the end of the year and the first couple of months are heavy cash inflow months as people replenish their 401Ks and IRAs," said Roberto Plaja, vice president of global fixed income and global asset allocation at J.P. Morgan Investment Management Inc.

"So with the double hit from lifting of spirits from fears of Y2K and the seasonals, the expectation is you are going to see fairly well-supported markets," added Plaja, who oversees $160 billion in assets.

Some investors predict markets will stall around mid-December while players hold their breath, dreading some cataclysmic computer crash at the dawn of the new year.

But U.S. officials are playing down the possibility of major disruptions to the national infrastructure from the Y2K bug -- caused by antiquated software programs that render some computers unable to distinguish between the year 2000 and 1900 because they read years using only the last two digits.

Although many experts now view Y2K as more of a psychological than a technological threat, some investors are lightening up on risky positions in equities and lower quality bonds in favor of cash.

TURNING A MOUNTAIN OF CASH INTO A MOLEHILL

Donaldson Lufkin & Jenrette (DLJ) chief investment officer Thomas Galvin said this is the first year since 1991 that cash flows into money market funds have nearly outpaced equity mutual funds.

"This year, people have had more to worry about whether it's the Fed or Y2K. Investors have taken a more cautious approach and moved to the sidelines," Galvin said.

DLJ's recent meetings with portfolio managers confirmed they have been holding more cash than normal, he noted, either because their clients have requested it or because the mutual fund companies anticipate redemptions.

"Once consensus realizes that the world is not coming to an end in January 2000, investors will want back into the market at the same time through the same door, we predict, and all of the cash now sitting on the sidelines will drive the stock market higher," Galvin predicted.

That stampede back will produce a "millennium melt-up" -- a January effect three or four times stronger than in recent years, Galvin said.

J.P. Morgan's Plaja agreed the building blocks are in place for a stock market rally early next year.

"Can the Dow go to 12,000? 13,000? It's a reasonable possibility," he said of the U.S. blue-chip stock index, the Dow Jones industrial average. The Dow was trading around 11,000 on Tuesday.

Y2K FEARS PEAKED IN SUMMER, THEN SOOTHED BY FED'S STANCE

Richard Schwartz, money manager at New York Life Asset Management, said Y2K fears in U.S. debt markets peaked at the end of summer but have since subsided, sending money back into riskier assets.

Emerging market bonds, for example, have already gained 21 percent in the last five months according to the J.P. Morgan Emerging Market Bond Index. Investors have been buying the debt in anticipation of a powerful rally next year.

Y2K anxiety was much more pronounced in the summer, driving prices in private debt markets down sharply and interest rates up relative to U.S. government bonds.

But the Federal Reserve helped alleviate those fears with an aggressive plan that assured banks and brokerages they would have easy access to liquidity if faced with extraordinary demands for cash from customers around year-end.

"All of this contributed to people relaxing and we have seen in the price movements that they have been buying back risky assets fairly aggressively. Equities have done spectacularly," said Plaja.

But there are still some residual signs of Y2K uneasiness, said Roger Bayston, senior vice president and portfolio manager at Franklin Templeton Group.

Primary dealers of government securities, those who deal directly with the New York Fed, do not want to hold onto large supplies of fixed-income securities, he observed.

"Dealers are paring inventories back. That is a function of management concern," said Bayston who oversees $10 billion in assets. Debt markets will get a shot in the arm if that accumulating cash is funneled back into bonds early next year.

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What can one say!!

Ray

-- Ray (ray@totacc.com), December 02, 1999

Answers

Whenever Y2K settles down, the market will takeoff. I will be there adding fuel to the fire or air to the bubble, my finget on the trigger.........

Heck, I have had just way too much fun with the market this year and I wish that Y2K would just go away.

6374 DOW during Y2K. 15,000 very fast on recovery.

-- the Virginian (1@1.com), December 02, 1999.


Yihaaaaaaaaaa!!!!!

Boy it feels good to write something with hope and optimism!

-- the Virginian (1@1.com), December 02, 1999.


Take a good hard look at this chart, when the resolution comes if won't be pretty:

NYSE Composite and associated Advance/Decline lIne

It took 25 years for the stock market to return to its 1929 valuations this time around it will be much longer.

Ray

-- Ray (ray@totacc.com), December 02, 1999.


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