March 2000

Chase Economist Predicts Markets Down at Year-End

Advice to Suffolk CPAs: Buy Bonds

Chase Bank Economist Irwin Kellner in his annual address before the NYSSCPA Suffolk Chapter predicted a declining stock market for 2000.

Dr. Kellner thinks value stocks are the place to invest and bonds are a good investment at the moment.

"The Dow Jones Industrial Average will end the year 2000 at the 10,000 level," Kellner said at the February 15 meeting attended by Suffolk Chapter members and individuals from the Long Island banking community. "Federal Reserve Board Chairman Greenspan will continue to raise interest rates, in small increments, until the stock market bubble is burst."

When asked about the NASDAQ market, Kellner said, "That market represents the bubble, and it will end the year at around 3,500."

Kellner, who is also professor of economics at Hofstra University, took note of the dramatic rise in the price of oil from $10 a barrel not long ago to the present $30 level. He said that three times in recent history increases in energy costs of that magnitude have occurred--1974, 1978, and 1991--and in those years, a depression, recession, or period of inflation followed. Kellner, however, does not believe the current increase will have the same effect.

"Our automobiles are more fuel efficient, our office buildings, a large portion of which were built after 1980, are more energy efficient," he said. "Oil will not generate more inflation and should not be a factor in Fed monetary policy."

In Kellner's view, a "pause that refreshes" has just occurred in the economy, with consumers and businesses living off supplies and inventory built up prior to year-end in anticipation of Y2K problems. He said that the gross domestic product will grow less because of it in the first quarter of 2000, thereby keeping price increases in check.

Kellner explored the consequences of the inverted yield curve the market is experiencing where short-term rates are higher than long-term rates, which produces negative margins to banks. It is not a danger sign, he said, but rather reflects the markets' confidence that the Fed is on the job and will keep inflation under control in the long run. The market thinks the higher short-term rates will not last.

The trade deficit is worrisome, in Kellner's view, but budget surpluses will continue to grow as long as we have a Democratic president and Republican Congress.

The overall view of the economy, according to Kellner, is that there will be no material change in inflation or a recession from traditional causes. He sees no overheating in the economy. The Internet is helping by enabling consumers and businesses to shop prices, which will help keep inflation in check.

But the stock market remains the major Greenspan concern.

"Irrational exuberance in the market is driving prices higher and higher," Kellner said. "The stocks in the Dow Jones Industrial Averages are overvalued by fifty percent."

He also believes the bubble will burst for those high flyers that are losing money. He pointed out that the market is very vulnerable to bad news and for these reasons he predicts the Federal Reserve Board will raise interest rates in small increments until "the stock market cries 'uncle'."

"The Fed must act with restraint and in small increments so as not to bring the market crashing down," he said, which he stressed would be disastrous because of the many Americans who are now in the market.

Suffolk Chapter President Robert S. Peare introduced Kellner and thanked the chapter's Real Estate and Construction Committee for hosting the meeting and Chase Bank for sponsoring Kellner's presentation and the reception preceding the dinner meeting. *