Cayman Islands: Market Viewpoint

Last Updated: 26 March 1998
"Market Viewpoint is based on information which we consider to be reliable, but is not guaranteed as to accuracy nor does it purport to be complete."

Market Viewpoint
"Blame it on El Nino"
Sheree Ebanks, Senior Manager-Investment Services
Bank of Butterfield International (Cayman) Ltd.
March 13th, 1998

Why not? The poor little boy has been blamed on everything else this year, we may as well add the turbulent market we have been experiencing. For those of you who remember the article that appeared in the 2nd quarter of 1997, we likened the market to one of the rollercoaster rides at Busch Gardens. Guess what, it's not over yet. No, don't panic....not the bull market we have witnessed for the past three years, just the volatility. But, hang on, let's take a look back before glancing forward.

1997 Scoreboard

INDEX               1997          1996

Dow Jones
Industrials         25.05%        29.13%

S & P 500
Stock Index         33.17%        23.07%

Bonds-Investment
grade all
maturities             10%          3.4%

Butterfield
International
Balanced Fund        14.2%          6.4%(6 months only)

Gold               -21.48%        -5.10%

Silver              25.05%        -9.60%

AFC 31/ NFC 24

It's still hard to believe that it was just December 1996, when the Dow was at 6,400 (or near about) that we heard those two words, "irrational exuberance", spoken by Federal Reserve Chairman, Alan Greenspan. This was probably led by the belief that valuations were getting high. Many now believe the same and are looking for a market correction of 30% - 50%. What's even more amazing is that we have had three consecutive years of 20%-plus stock-market returns-defying all laws of gravity. It has never happened before. The Dow Jones Industrial Average started the year at 6,448. With many bumps along the way, it hit our target of 8,200 in July and finally finished the year at 7,906.50. We weren't so adept with the interest rate prediction. We expected the long bond to close out the year between 6 1/2% - 7%. During the year the long bond yield fluctuated between 6.64% at the end of 1996 to a high of 7.10% in March (right after the Fed raised rates and markets went down the drain), closing the year at 5.92%. The year end rally in the bond market was preceded by the Asian Contagion, as it has been dubbed. We have been spoiled by the stock and bond market performances over the past few years; so what's in store for 1998?

More of the same! I think that the safest bet for 1998 is that we can expect continued volatility, more and more frantic phone calls from worried investors, and some sleepless nights. We still believe we are on target for Dow 10,000. Would you believe that the S&P 500 crossed through the 1,000 mark?

Factors that will have an impact on the market's performance this coming year will be (Surprise!) the direction of inflation, corporate profits and continued worries over Asia.

Before we get too much into the nitty gritty, let me first add that I still believe there is a lot of money out there with no place to go but to the US stock market. The last few years have added a new element to the melting pot of investing. Those of us Baby-Boomers, who have been spoiled by these exceptionally good markets, are convinced that the only way to save is through the stock market; this participation will continue, bringing more and more money to Wall Street.

We see a stable economic situation in the US, again contributing to good markets. Many people have batted around the "D" word. Deflation is the opposite of inflation, a drop in general price levels. We don't see this happening. Inflation will remain subdued, perhaps as low as 1 1/2% by the end of 1998, the Federal Reserve may even look at bringing rates down from the current Fed Funds rate of 5 1/2%, but I doubt it. Growth will continue at around the 2% level for the year. All in all, a golden scenario.

One of the other factors mentioned earlier is the Asian Crisis. I believe the worst is over and the situation has stablised. Remember Mexico? The Mexican crisis happened late 1994, early 1995. Well, guess who was the star performer for the year... Mexico! A 54.21% rise in U S dollar terms. These markets too, will rebound eventually. What will develop is pressure on exports reducing growth by 25 to 50 basis points; however, interest rates have been coming down thus taking the pot off the stove thereby balancing growth. Corporate profits will also be effected, but are still expected to come in around the 10% level.

On a lighter note, the AFC won the Super Bowl for the first time in 13 years. The last time they won the stock market was flat, bringing in 1984 at 1,220 and ending at 1,211. So, if you use the Super Bowl indicator, don't expect much this year!

We do expect a cooler year, (this could be attributed La Nina, another weather phenomena expected to take over from El Nino mid-year). The Dow will still be up around 10% after the wild ride and close the year between 8,400 - 8,700. The long bond will remain low maintaining a level between 5 3/4% to 6%.

So, strap on those seat belts and hang on to your hats. Stay conservative, very selective and don't panic!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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