Smoke Signals
Industrial stocks, along with financials and healthcare, are the market's hot spots
In the very early stages of a bull market, investors tend to act a lot like teenagers: They're carefree and impetuous, and they take a lot of chances. That was certainly the case last year, as Wall Street took a "What, me worry?" attitude and bid up small, speculative, and even profitless stocks. "I don't think we're going to see that this year," says Christopher Orndorff, head of equities for Payden & Rygel. "This is going to be a more mature market."
Bull markets, like human beings, eventually grow up. They settle down and slow down. After a year in which the Nasdaq soared more than 50 percent, Mark Jordahl, chief investment officer for U.S. Bancorp Asset Management, thinks the market will see "upper single-digit to low double-digit returns." Smith Barney strategist Tobias Levkovich thinks the S&P 500 could even fall slightly in 2004, saying "a low-return environment for the next several years may be in the making."
That's in part because as bull markets age, investors start to worry more. They demand not only the potential for future growth but consistent earnings and current revenue growth. That shift in attitude, should it come to pass, could put the spotlight this year on a couple of sectors that were somewhat overlooked in 2003: financial services and healthcare. The latter should see 15 percent earnings growth in 2004, up from 10 percent last year. And as the economy improves, financial services firms like Citigroup may well see double-digit revenue growth.
Changing gears. Meanwhile, as the economy downshifts from the torrid growth of the third and fourth quarters, investors are likely to switch in 2004 from "early stage" cyclical sectors like technology, retail, housing, and autos to more "mature stage" sectors, in anticipation of a pickup in business spending and production. The recent uptick in manufacturing, for instance, could spark more interest in the stocks of basic materials companies, like DuPont, and energy firms like ChevronTexaco or ConocoPhillips.
This shift will also benefit the big blue-chip stocks like Microsoft at the expense of small unproven companies that tend to do best at the very earliest stages of a recovery. Though the Russell 2000 index of small-cap stocks trounced the megacap Dow Jones industrial average last year, their fortunes reversed last month. Over the past four weeks, the Dow gained more than 7 percent while the Russell rose only 4 percent.
If the dollar continues to weaken and global economies recover further, that would strengthen the case for large-cap dominance. A falling dollar means greater profits for U.S. companies that generate business and profits overseas, such as General Electric and Coca-Cola. If investors start to think about dividends again--as market strategists say they should given last year's reduction of taxes on this income stream--that too would benefit large stocks, since their dividend yields are on average 70 percent bigger than small stocks. "When you move into an environment where stock appreciation isn't 20 percent or more, but perhaps half of that or less, dividends become a larger percentage of one's total returns," says Harvey Hirschhorn, head of asset allocation and strategy for Columbia Management Group.
advertisement
