Set Yourself Up for a Stellar 2005

Today I will look ahead to 2005. Why so far down the road?

Because I think if you start planning now and make the right moves at the end of 2004, next year can turn out much better than many investors now fear.

That's not because Wall Street projections for 2005 are so rosy. Just the opposite, in fact. I'm relatively optimistic about next year, just because Wall Street is so pessimistic. In contrast to 2004, which began with Wall Street assuming that everything would turn out right after a great 2003, 2005 is likely to begin with a huge reservoir of fear. And I can see a couple of areas where the current pessimism is, if not wrong, at least overdone.

But before jumping too far ahead, first we need to better understand the current market rally and what it might tell us about the future. So what's driving stock prices up so strongly now?

It's All About Momentum

It sure ain't fundamentals. The Conference Board's composite index of leading economic indicators, which economists use to forecast growth, was down in October for the fifth month in a row. The conventional explanation is that the index is signaling a slowing economy and a weak 2005.

The core producer price index, which excludes volatile food and energy prices, climbed an unexpectedly strong 0.3% in October, raising fears that inflation at the producer level could be ticking up to levels that would have to be passed on to consumers.

And finally, Wall Street is predicting that we've passed the peak in earnings growth. Earnings for the stocks in the S&P 500 are now projected to climb 17% in the third quarter that ended Sept. 30 from the same quarter in 2003, according to Thomson First Call.