After a 3-year bear market battered by woes ranging from corporate malfeasance to terrorism and escalating geopolitical tension, the markets had a good year in 2003. As of the third week in December, both the Dow and the Standard and Poor’s (S&P) 500 had gained almost 24 percent this year, and the Nasdaq 100 was up by more than 40 percent. December also saw the Dow hit –and soar through—10,000, hitting this benchmark for the first time in more than 18 months. Back on Wall Street, a surge in initial public offerings (IPOs) in December, made more notable by the year-long dearth of new equity offerings, was tangible proof of a continued economic recovery.

Year-end economic data delivered a mixed bag of encouraging and disappointing news with good cheer coming from the industrial sector which showed the best production data in four years and an increase in the utilization of factory equipment. Housing starts continued to increase, but permits declined, and a fall in the consumer price index disappointed, but did not dismay, investors.

In addition to the good news, December also saw its share of dark clouds and disappointments. Additional mutual fund scandals came to light and further woes befell the New York Stock Exchange (NYSE), when the $154 billion California Employees Retirement System filed a class-action lawsuit against the NYSE and seven specialist trading firms alleging fraudulent practices.

Good News for Wall Street
The capture of Saddam Hussein was good news overall for Wall Street. His incarceration raises President Bush’s popularity and diminishes the appeal of the Democrat front-runner Dean, whose plans to raise taxes are anathema to the Street. The announcement that President Bush has vetoed participation from French, German and Russian companies from lucrative reconstruction contracts in Iraq suggests that U.S. firms will benefit from the rebuilding effort, and is viewed as a further potential boost to the markets. However, the fact that Saddam’s capture did not boost stock prices significantly disappointed some pundits, who rationalized that the market had already priced this good news into its valuations. Some analysts suggest that the markets’ lackluster response to the Saddam coup indicates real vulnerability to any future bad news.

There is no shortage of optimists—some more cautious than others. These bullish analysts forecast continuing recovery, citing economic reports that show U.S. gross domestic product surged to an annual rate of 7.2 percent during the third quarter of 2003. They note that third quarter earnings were strong and are expected to remain that way through the fourth quarter and into the beginning of 2004. Interest rates are at 40-year lows and the Federal Reserve has indicated that it is in a “holding pattern”, despite worries about a declining dollar and the threat of rising inflation. However, despite their optimism, many commentators warn that the market is unlikely to deliver as stellar a performance in 2004 as it did in 2003.

Amongst the bulls, restrained optimism prevails. Many experts are sticking with consumer-related stocks in 2004, anticipating continued spending by cash-rich consumers spurred by tax cuts and some $85 billion in tax refunds. Some analysts looking at business spending trends, anticipate recovery in the cable and TV sectors thanks to increased corporate advertising spending and the added boost of the 2004 Olympics. While others, with an eye on world affairs, are plugging defense and energy stocks.

The bears –many of whom agree with the economic predictions of their more positive colleagues—still fear that there is not a lot of potential upside in equities. Some see geopolitical risk as a continuing wild card. And others feel the Fed’s monetary policy is lax and fear a return to the speculation-fueled and liquidity-induced excesses of the bull market that cratered in 2000.

One thing seems certain in an uncertain world, that finding equities with growth potential --without paying a hefty premium -- will probably be tougher in 2004.

Have a Happy & Prosperous New Year!