WOW! For the forth year in a row, the equity markets produced returns in excess of 20% as measured by the S&P 500. A late summer correction was over quickly and the forth quarter produced a complete recovery in the stock market averages. On 16 occasions, sharp price swings left the Dow more than 200 points higher or lower in a single day. Losing perspective and commitment to long term goals became very expensive in 1998. Market timers mostly lost out. Volatility became more than a concept to market participants, it became a personal experience.

The markets again reflected the have, and have not dichotomy in the economy. Many large, well-capitalized, companies with excellent management teams continued to show excellent results. Struggling firms continued to struggle. The markets ignored many mid-sized and smaller companies, which stayed in trading ranges with little participation in the overall trends.

Ninety-three months of economic expansion and still counting! Growth in the U.S. still looks to have excellent momentum. A few months ago, many economists predicted a recession in the near future. Although slowing, the surprise so far has been how strong and resilient the economy remains. In the third quarter "Perspectives" we predicted very subdued growth. We would now lift those expectations modestly and predict growth in the 1 1/2 to 2 1/2% range for 1999.

Interest rates are down and may go lower. Commodity prices are low and may remain at depressed levels. The EMU begins operating with a single currency and coordinated economic policies in 1999 which should in time set the stage for faster growth. Japan, in its own awkward way, is beginning to deal seriously with the problems in its financial system. Some Asian economies and markets may have bottomed and appear to be in the very early stages of recovery. So the bet that 1999 will continue to show growth both internationally and here, looks to be a good one.

Growth, growth, growth, will most likely continue to be the mantra for the New Year.

Large capitalization growth stocks far outperformed all other categories in 1998. We look for an extension of this trend throughout much of next year. Value stocks and small capitalization companies will probably not perform well on a sustained basis for some time, although we will be alert for a change in this trend.

The year ahead will probably prove to be a stock picker’s delight. Growth companies, which can continue to deliver, will probably continue to trade at a premium to the rest of the market. A failure to deliver on expectations for earnings growth will be met with immediate and sometimes severe declines. Risk on individual securities will be high, requiring particular attention to fundamentals, proper weightings, and diversification.

Expect more volatility. Two hundred and three hundred point moves might not be uncommon throughout the year. Some speculative sectors such as the Internet mania might blow-up, creating shock waves for the rest of the market. However, we expect respectable returns for equities in general in1999. Discipline and prudence will be the keys to capturing those returns.

Spreads between treasuries and just about all other categories of bonds widened to historic ranges during the third quarter and will probably continue to stay wide. Slowing economic growth in the US may cause concerns. Additional anxiety about Russia, Japan, China, and Brazil may also assert themselves from time to time. High quality and liquidity will probably again outperform other categories. However, if the economy continues to surprise with strength, then other types of bonds will begin to out perform the high quality sector.

Our individual stock selections and model portfolio produced outstanding results for 1998. Our asset allocation strategy, to focus upon high quality securities in both the fixed income arena and among equities, was accurate as to where the best returns were available.

Mutual Funds that emphasized large-cap growth and technology stocks performed the best this year. Large-cap value, small-cap, and many specialty funds lagged in this growth environment. Fixed income funds and securities which were not in the high quality and liquid sectors also lagged.

Companies that can show consistent growth become highly valued in a slow growth, highly competitive, low interest rate environment. If the economy accelerates and profit growth broadens, then the premium valuation for these companies will decrease. We do not look for a change in this trend in the near future, but we will constantly assess changes as they occur.

We are modestly changing weightings in our model portfolio and consequently in client portfolios to better reflect our growth expectations. We are shifting mutual fund selections to better fit the environment. Clients have seen some shifts and may see more in the first quarter of 1999.

Our fixed income strategy remains the same for the New Year. Average life and duration targets remain in the 5-7 year range. We remain focused on high quality and liquid fixed income securities. However, we are allowing for modest weightings in other categories of fixed income securities anticipating the possibility of better than forecasted economic growth.

Many new clients bring us different types of accounts with a wide variety of securities. Many of these securities were acquired over a long time and from many different sources. Some may have been inherited. Some purchased for reasons long since forgotten. When we format these securities into a report that shows the weightings for asset classes and economic sectors, we often find unintended weightings and a risk profile different from the client’s objectives.

At Riverplace Capital, we start by understanding the client’s objectives, risk tolerances, liquidity needs, etc. Each client’s portfolio is individually constructed to an investment policy outline, which reflects the client’s needs.

When we have to deal with existing securities, we also have to craft an implementation strategy which takes into account a client’s tax considerations, preferences, and concerns. Sometimes this strategy has to be pursued over several years. In some instances, we work around certain assets to construct a portfolio that will still meet the client’s goals. So if you want to get the best out of your assets, ensure that the risks you are taking are appropriate for you, and benefit from professional management, TALK WITH US.