Traditionally as the year draws to a close, the market gets a little quirky. And, this past November was no exception. Up some... and then down some, the market has responded feebly to good economic data and earnings news, but retreated when terrorism fears resurfaced during the third week of the month.
What can we expect for the remaining weeks of 2003? And what about prognostications for 2004?
With no additional major economic news on the horizon, experts predict that the stock market will continue to be lackadaisical in December, as investors are distracted by the holiday season. Add to this the fact that most of us wait until late December to realize tax losses, make charitable donations, and take care of other year-end "house-keeping", and you can see why the end of the calendar year is not a "normal" time on Wall Street.
That being said, market data suggests that most of us do far less year-end planning and trading than perhaps we should. In addition to portfolio pruning to offset capital gains, smart investors should recognize that December and the first few weeks of the New Year historically have exhibited some anomalies-some year-end phenomena-- that can create opportunities for savvy investors and potential pitfalls for the unwary. Here are some observations and a few thoughts to consider:
What's Ahead in 2004?
- Be aware of a couple of anomalies -- valuation patterns -- that come into play in December and January. Researchers have noted that stocks that have performed well throughout the year usually do even better in December. This observation applies primarily to equities issued by large corporations with high trading volume. Prevailing wisdom suggests that this "bump" in stock valuation -happens because investors typically don't sell equities that have generated a nice profit in December. That in turn creates a seller's market and an upturn in the stock price. Conversely, stocks, jettisoned at year-end as investors look to offset capital gains, get pushed down to the point where their valuations seem like bargains. Wall Street pros note that these year-end losers often show significant gains -a bounce--but that the gains usually occur only during the first few trading days of the New Year.
- Schedule a time now to meet with your tax consultant and your investment advisor to plan your year-end portfolio strategy-don't wait until the middle of the Holidays to try to find the time to plan tax-related trading.
- Smart year-end trading requires both strategic planning and discipline. By all means, unload losers to offset capital gains—but do so after consulting your tax advisor--and don't wait until the very end of December to sell. Hold on to winners until next year to postpone capital-gains taxes for a whole year.
Many stock market experts believe we are now entering into the second stage of the bull market, a period characterized by increased volatility, slower growth rates and deceleration of earnings growth. Some predict that the Dow will break through 10,000 in the next month or two, but also caution investors to scale back their expectations.
Although the consensus is that we will not see a repeat performance of the market's growth in 2003, most experts are generally optimistic. Here's what the gurus believe will drive the market in 2004:
- Economic growth will continue, but at around 4 percent rather than the stellar 7.2 percent annualized rate recorded during the third quarter of 2003.
- Economic data is expected to meet, rather than exceed, expectations.
- Interest rates are expected to continue at current low rates. The Federal Reserve has indicated no plans to hike rates, which means that stocks will continue to be an attractive alternative to money market funds and certificates of deposit. Low interest rates also help corporations reduce the cost of borrowing and will help boost profit margins, too.
On the down side, some gurus see a few dark clouds on the horizon. The stagnant job market continues to cause concern. Experts fear that, unless the job picture improves, consumers may begin to cut spending with significant impact for the nation's overall economic health. Others point to the anticipated deceleration in earnings growth. As a result, they believe the Dow Jones Industrial Average (DJIA) will outpace the Nasdaq 100, and recommend that investors unload over-valued tech stocks and build a more defensive portfolio to reflect the composition of the DJIA.
Bottom line: Timing is everything…especially as the year draws to a close. And so, make time now to plan your year-end tax-related trading and to develop a winning strategy to leverage every opportunity available to you in the New Year.
May you experience all the joys of the upcoming holiday season and enjoy prosperity, peace and happiness throughout the New Year.