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Are We In for a Seven-Year Rally?

Big-Caps Try to Earn Investor Confidence

Many large companies have done their part to encourage investors to feel increasingly confident about their own prospects by innovating mightily during the recent downturn. New products generate new sales and income at the margins, and make investors want to participate in the companies' success. Two examples:

  • Starbucks (SBUX) shares are up 48% this year. Credit their success, in part, to their smart decision to increase sales during the summer with a new line of iced, shaken sweet tea and coffee drinks. Beverages like the Vanilla Cr¿me Frappuccino also broadened the company's appeal to noncoffee drinkers, such as the children of their regular customers. Starbucks' revenue in the second quarter of this fiscal year jumped to $954 million, from $783 million the previous year.
  • Intel (INTC) shares are up 96% this year. Credit that success, in part, to the company's decision to shift focus from sales of semiconductors that run desktop personal computers to sales of a new breed of semiconductors that power access to wireless broadband networks. Intel launched its new Centrino line of Wi-Fi chips in March with a massive advertising campaign that has yielded big dividends. Sales in its fiscal second quarter hit $6.8 billion, up from $6.3 billion the previous year. Earnings, meanwhile, doubled from 7 cents per share to 14 cents.
  • What We Need Now

    The good tidings can continue, resulting in higher stock prices a year from now, if a few things go right:

  • Employment, capital spending and inventories must continue to grow, making the economic recovery so self-sustaining that it doesn't require further fiscal or monetary stimuli from the government. Pay special attention to improvements in unemployment and personal income, as nothing juices the economy more than an increased number of workers making more money. A jobless recovery is one thing, but a job-loss recovery won't cut it. Consumers panicky about their pay prospects will stop spending and abort the recovery.
  • Demand in every region of the world -- especially Latin America, Japan, Europe and China -- must improve. At this point, all but Europe are on track.
  • With the economy operating below its potential, inflation needs to remain muted. Oil has to stay beneath $30 a barrel, and interest rates need to stay fairly low. Low rates will allow homebuilding and home refinancing to stay on track.
  • An improving economy is needed to lift tax revenue, narrowing the federal and state budget deficits. Diminishing fears of an out-of-control deficit opens the door to the extension of tax cuts in 2004-05, particularly if President Bush is re-elected.
  • A growing appetite for U.S. goods among the emerging middle classes of China and India could give our economy a "boom" look -- vindicating free-trade advocates and producing winners all around.
  • Analysts at investment research firm ISI Group point out that the longest economic recoveries in the past have started out the slowest. If things go well, the U.S. might not face another recession until at least 2010. And seven years of expansion would be very kind to stocks, making the 25%-plus advance of the past year look like a nice start, not a false start.

    Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jdm@oddpost.com. At the time of publication, Markman owned or controlled shares in Pacific Sunwear and Starbucks.
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