What 2004 HoldsEven the bulls recognize that the rare confluence of factors that 2003 offered -- low expectations, more reasonable market valuations, easy year-over-year earnings comparisons, negligible inflation, near-zero interest rates and a major fiscal stimulus policy -- are no longer with us for the coming year. T. Rowe Price's Smith points to two factors that make 2004 look somewhat less glamorous than this year. First, 2003 featured an improving economy with flattish interest rates. Further economic improvement will almost certainly include at least slightly higher interest rates, Smith said. The second factor is an imprecise measure that might be called the expectations gap. "If you believe somewhat in the equation that satisfaction equals reality minus expectation, the gap was quite wide this year. Next year, it's almost impossible for the gap to be that great," Smith said. Meanwhile, new worries lurk to tamp down expectations, including an almost inevitable rise in interest rates and inflation, the specter of a much weaker dollar and overstretched valuations among many of 2003's leaders. Many think Federal Reserve Chairman Alan Greenspan will keep interest rates low -- both to keep the economic recovery on course and to avoid having rising rates become a political issue during the 2004 election. However, given that the market is predictive by nature, concerns about rising interest rates and inflation could put a lid on the market's strength. While several money managers anticipate the stock market in 2004 will rise in the high single digits to the low teens, they expect leadership will shift away from this year's highfliers and in to some of the higher-quality fare that lagged a bit in 2003. "I think there's a very significant rotation in the marketplace right now," said Cumberland's Wilcox, who expects the S&P 500 could end 2004 at 1250, up about 17% from current levels. The rotation involves a movement away from the more speculative tech fare that has already doubled or tripled over the past year and into quality stocks and sectors, especially energy companies. "Most managers are asking, 'Why do I still own XYZ tech company at a valuation of 200 times earnings?' I'm very excited about energy and exploration, which has been a laggard." Among Wilcox's favorite sector bets: Hanover Compressor ( HC), Spinnaker Exploration ( SKE) and Dynegy ( DYN). In late 2002, Wilcox predicted the S&P 500 would end 2003 at 1100 -- a call far more bullish than many peers that ended up close to the mark. Wilcox's prediction for 2004 is based on expectations for real GDP growth of 4% and operating earnings in the S&P 500 of high $60s to low $70s per share. Wilcox acknowledges several factors may trip up his sanguine outlook. His "worry case" includes geopolitical risk, an unstable currency policy, a presidential election and inflation -- "We've got the seeds in place for meaningful inflation," he said, which the market may predict before it actually arrives.
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|2.||Market Rally Still Has Legs|
|3.||Asset Allocation Done Right|
|4.||The Five Biggest Scandals of 2003|