Where the market experts would put your money in 2004


December 28, 2003|By EILEEN AMBROSE

ENJOY THIS year's stock market returns. Gains next year won't be at this level again, say market experts offering advice on the best investment opportunities for 2004.

The Nasdaq composite index, loaded with technology stocks, is up nearly 48 percent for the year. The Dow Jones industrial average of 30 blue-chip stocks and the broader S&P 500 index have gained around 24 percent.

"We had paradise in 2003. Keep in mind, we had to deal with a war in Iraq, continued war on terrorism, more greed exposed on the New York Stock Exchange, more scandals in the mutual fund industry, but we overcame all this," said Al Goldman, chief market strategist with A.G. Edwards & Sons in St. Louis.

Goldman expects the three major indexes next year to end up 12 percent to 14 percent.

"Strong first half, lackluster second half. That's our theme," said Richard Cripps, chief market strategist for Legg Mason Wood Walker Inc. in Baltimore. Cripps predicts the Nasdaq may end next year with no gain or possibly be down 20 percent, while the other two indexes might be flat.

For investors, finding next year's best investments may require a shift in strategy, experts said. This year's leaders may well be tomorrow's laggards. And there's a series of factors at play next year that can affect the market for good or bad: The presidential election. Unemployment. A potential rise in interest rates.

For example, election years, no matter who is in office, tend to be good for the market because administrations usually pull out all the stops to boost the economy and employment to win re-election.

Right now, many expect President Bush to be a shoo-in, particularly with Saddam Hussein's capture and the growing economy. But Cripps is among those predicting a close election.

"We have a divided electorate," Cripps said. "The possibility that we could have a change of administrations could really inject some uncertainty in the market." And, as we've all come to know, the market hates uncertainty.

So, with the caveat that events and assumptions can change, market experts gave their take on the best places for investors' dollars next year:

Goodbye, small caps. Shares of small- and mid-size companies prospered in the bearish market. If you had invested, say, $10,000 in the S&P 500 large-cap stocks three years ago, it would be worth about $8,000 today, Cripps said. But $10,000 in small and mid-cap stocks would have grown to $13,000.

Next year, as the bull market and the economic recovery mature, the shift will be to large company stocks, especially those that pay dividends, experts predict.

Dividend-paying stocks failed to get an expected boost after a new tax law this year reduced the rate at which dividend income is taxed, said Chuck Carlson, contributing editor of the Dow Theory Forecast newsletter.

But with the prospect of more modest gains in stocks, dividends will come back in vogue as investors try to boost their total return, he said.

Hello, higher rates. The question seems not to be whether the Federal Reserve will raise short-term interest rates but when. The Fed won't want to interfere with the election, so a rate boost will likely occur in early summer or after the November race, experts said.

Higher rates generally hurt stocks because they raise the cost of borrowing for businesses, but the impact may be less damaging next year.

"Interest rates are at such low levels, doubling them from 1 percent to 2 percent is still low by historical standards," said Scott Horsburgh, chief investment officer for Michigan money manager Seger-Elvekrog. Higher rates, too, "will be offset by the improving economy and corporate profits," he added.

Rising rates also would lower the prices of existing bonds. "As long as inflation is under control, it probably won't be a devastating thing," said Mario DeRose, a market strategist with Edward Jones in St. Louis. "Bonds could still end up providing a positive return with the income they provide."

Of course, with rates and inflation so low, there's nowhere else to go but up, so "keep the bonds shorter-term so you don't get hammered if the worst does happen," Horsburgh advised.

Technology, so 2003. Traditionally, the biggest losers in a bear market tend to become the leaders of a brand-new bull market. That's the case this year, as once-battered tech stocks soared. But while the sector's prospects have improved, they haven't improved enough to justify today's high prices, some said.

"Technology does look ugly for 2004. It's extremely overvalued right now," said Pat Dorsey, director of stock analysis for Morningstar Inc.

Promising sectors. There are few sectors that experts agree will be clear winners next year. Energy, which includes oil and natural gas producers and companies providing related services, is one of them.

As the worldwide economy continues to improve, demand for energy will only increase, particularly in China, they said.

Manufacturers, including automakers and companies that make equipment or materials for other businesses, also are expected to do well. "The ones that have the dirty factories are the ones that will sizzle," Horsburgh said.

Go international. It's always good advice to have exposure to markets outside the United States as part of a diversified portfolio, and next year may give investors even more reason.

The weak dollar can benefit U.S. investors when the money they invest overseas is converted back into U.S. currency. For example, if European stocks go up 5 percent, and the dollar falls 5 percent against the euro, "you made 10 percent," Dorsey said. Also, some experts predict that earnings growth at foreign companies, especially in Europe and Asia, will exceed expectations and the performance of U.S. companies.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose- @baltsun.com.

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