Stocks prove they also rise

Memorable: Investors who once worried that the stock market might never again go up will not soon forget 2003, the year of double-digit happiness on Wall Street.

January 01, 2004|By Paul Adams | Paul Adams,SUN STAFF

Major U.S. market indexes finished 2003 with double-digit annual gains, ending the longest losing streak since the waning years of the Great Depression and leaving Wall Street optimistic about a sustained economic recovery in the year ahead.

The first year of gains since 1999 far exceeded most analysts' predictions of 12 months ago and came despite a demoralizing mix of war, unemployment, weak corporate profits, mutual fund scandals and anxiety about another terrorist attack.

The S&P 500 index ended up 26 percent for the year; the Dow Jones industrial average gained 25 percent; and the Nasdaq composite index soared 50 percent.

"It's been a spectacular run-up considering it has really only been about nine months in length," said Andrew Clark, senior research analyst for Lipper Inc. "We're talking about 30 percent returns in a lot of cases for equity funds. That's a really good nine months."

Analysts are quick to point out that the 2003 rally was funded by billions of dollars in federal spending and massive tax cuts packaged with Federal Reserve policies that have delivered the lowest interest rates in generations. Much of that federal stimulus will be absent in the year ahead, which means it will be up to corporate America to keep the rally going by boosting capital spending and hiring, analysts said.

"The plus side is that the government has just been spending like a son-of-a-gun," said William F. Dwyer, president and chief investment officer for M&T Investment Group. "But the momentum will carry through easily to June of next year. There's an improving confidence level that's being developed."

During the year, the Dow gained 2,112.29 points, closing yesterday at 10,453.92. The Nasdaq rose 667.86 points to close the year at 2,003.37, and the S&P added 232.10 points to finish at 1,111.92.

Chip maker Intel Corp. was the Dow's biggest winner, rising 106.8 percent for the year, while Caterpillar Inc., which makes earthmoving equipment, came in second with an 81.5 percent gain. Eastman Kodak Co. was the Dow's worst performer. On the S&P, Avaya Inc., the nation's largest maker of office telephone systems, led the pack with a 428.2 percent gain.

Despite the celebration on Wall Street, most investors haven't forgotten that the gains of 2003 are not enough to replace the unprecedented wealth created in the last bull market, which fizzled in spectacular fashion when the Internet bubble burst. The Dow is still well off its all-time high of 11,722.98 in January 2000, and the Nasdaq is nowhere near its March 2000 peak of 5,048.62.

"The returns on a percentage basis were outstanding this year, but they were coming off of a very low base," said Joseph Cirelli, a financial consultant for Salomon Smith Barney in Baltimore. "The [Nasdaq] is still over 60 percent off its year 2000 peak."

And while most expect this year to end in positive territory, there is little optimism for a repeat of the 2003 rally. The federal spending and tax cuts that fueled recent growth won't deliver the punch they did last year, and most analysts are expecting the Fed to inch interest rates up this summer if the economy continues on its current growth trajectory.

Similarly, the refinancing boom that sparked a spending spree among homeowners has largely played out.

"In the early part of the year we're likely to continue some of this near-term momentum, but close to the middle of the year, the market is going to start to concern itself with some of the government stimulus wearing off," Cirelli said.

Salomon Smith Barney has a 2004 year-end target for the S&P of 1,025, which would put it slightly below where it is today.

Larry J. Puglia, who manages T. Rowe Price's Blue Chip Growth Fund in Baltimore, agrees that this year's returns won't match those of 2003. But he is forecasting an annual gain in the 10 percent to 12 percent range, with blue-chip stocks gaining ground after four years that saw small-cap stocks lead the pack.

"I think there is a preponderance of evidence that at a minimum, we're no longer in a bear market," he said. "It's not clear whether we're in a new bull market or expansion phase of the market."

Clark, the Lipper analyst, pointed out that it is not unusual to see market indexes climb as much as 20 percent to 30 percent during a bear market, only to fall back into a cycle of declining returns. "Bear markets can have very significant rallies," he said. "You don't necessarily want to be whistling in the dark at this point."

The recent bear market has recorded its share of rallies, only to come crashing down just as fast as it went up. In August 2002, the Dow increased 17.5 percent in four weeks before giving up its gains and then some. A similar rally came along in November and October only to be followed by a 1,400-point fall.

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