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The driving force behind today’s stock market is the public. Never before had they had such clout.

Measured from the recent market month end lows (August 1998), the NASDAQ Composite has surged 67.1%, beating 86% of Leuthold equity sectors over this time frame.

1998 Inflation Projections: CPI expected to end 1999 about unchanged from year end 1998 levels (year over year change of 0.0%).

This Internet Insanity Index quantifies the mania which has swept up the Internet stocks over the past two years. It is constructed of first and second tier Internet components—technology companies that have been integral to the evolution of the Internet and retail companies which have gone through the roof by the mere mention of selling their wares over the Internet.

For 1998, Internet beat all other sectors, posting a 121% return.  Tech...Big Ten (+75%) next best sector in 1998.

Thermal pollution time again: Steve’s 1999 predictions for the economy and his market outlook, including a look back at last year’s forecasts.

Self-examination can be good for the soul if not the ego, so each January, time is taken to look back over the preceding year, critically reviewing the significant studies, portfolio shifts, and recommendations appearing in our publications. We include both the good...and the bad.

At current levels U.S. T-bonds are viewed as neutral.  U.S. T-bond upside potential now only slightly above downside potential.

As is typical, December was a weird month for the stock market, as year-end cross currents swirled. Market breadth, as measured by advance/decline studies, spurted late in December, but lagged for the month.

This was a year where the super cap growth stocks, especially the tech stocks, blew away most active managers. Our Technology...Big Ten sector (10 largest caps) was up 75% for the year. The high P/E tier of the Royal Blue Index was up an unprecedented 57%.

It certainly was an interesting year for mutual fund cash flows. In mid-1998, it became clear that investors were beginning to favor the relative safety of bond and money market funds over equity funds. Up to that point, equity funds had been getting the lion’s share of investors’ contributions.

The following table compares the performance of the Russell 2000 Index (since its inception in 1979) with the S&P S00. Over this entire period, the Russell has outperformed the S&P in ten of the twenty years (S0% of the time), producing a slightly lower annual compound rate, 12.4%, versus 13.6% for the S&P 500.

In 1998, the S&P 500 on a close to close basis moved up 1% or more on 47 trading days and down 1% or more on 33 trading days. Combined, this represents almost 32% of the 252 trading days. In 1995, only 5.2% of the trading days experienced moves of 1% or more.

The public is back as evidenced by strong mutual fund cash inflows. Seasonally strong Q1 mutual fund inflows should push the DJIA above 10,000. Traditional “January Effect” may be absent again in 1999, as it has previous four years.

In one of our California meetings, the trading frenzy in the Internet stocks came up.

Small cap fund flows improving, but well below 1997 and 1996 levels. Nearly 70% of November’s bond inflows of $5.5 billion were earmarked for High Yield funds.

Depending on what the December 15th list looks like and providing that the overall market is not soaring we might participate, anticipating a January-February bounce.

Volatility diminished in November after a very volatile month of October.

After noting last month’s declines in public confidence measures we wrote that, in order to sustain a rising stock market, these measures needed to improve in the next month. All of the confidence measures did improve.

Intrinsic Value benchmarks for each stock market average, using 1957 to date data. Using 1926 to date data the calculations are even more frightening.