Bulls and bears disagree on why markets were so rosy in 2003. And while they differ on the relative health of the market, they draw surprisingly similar conclusions about the market outlook for 2004 -- things are looking up.

Bullish participants say the rally that lifted the S&P 500 22.1% through Dec. 12 was the genuine return of a new bull market, fueled by strong economic underpinnings and a revival in earnings growth. Bears say the past year's gains represent an impressive bear-market rally sparked by one of the most overwhelming stimulus programs in economic history.

Despite the disagreement, many on both sides feel the market rally will be sustained for much of 2004, probably at a less vigorous pace, and led not by speculative tech stocks but by higher-quality companies and this year's laggards, especially energy companies. Meanwhile, many bulls and bears also feel that outside an event such as a major terrorist attack, inflation may loom as the biggest threat to the market and the economy -- but most feel it will be kept in check, for this year at least.

"This was a year of superfast growth in supercrappy companies," said Robert Smith, manager of the ( PRGFX) T. Rowe Price Growth Stock fund. "For 2004, expect a more normal market in a very strong economy -- think of a return in the 8% to 10%-12% range. The risk is more likely the fear of inflation and higher interest rates than earnings."

The year 2003 was indeed a great year for all participants in the U.S. stock market, except perhaps the short-sellers. Virtually any long strategy worked. If you felt nostalgic for the halcyon days of 1999, you could have purchased the S&P 500's Internet software and services components and posted a 162.1% gain. If you wanted to ride the housing boom, homebuilders' stocks netted a 96.9% climb. A bet on staid farm-machinery and construction stocks returned 57.9%. Or if you wanted to stash your money in gold stocks, you would have been rewarded with a 70.8% return.

While the debate over the "why" behind 2003's market may seem academic, it holds important clues about the market's course for 2004 and beyond. If the bulls are right, the strong economic recovery evidenced in the latest GDP figures and the robust earnings recovery should put the market on a smooth course. If the bears are right, the stimulus policies may keep the party going for much of the 2004 election year, but spell big trouble in 2005 and beyond.

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