Capitol crunch
Social Security and tax reform are on Bush's investor-friendly agenda
Bull runs usually last two or more years between major corrections. This current upturn in prices is now 26 months old, dating back to October 2002. And even though most of the major market averages are still a good stretch of the legs from their 2000 highs, they have posted some solid gains during this advance. The S&P is up 53 percent, the Dow 46 percent, and the Nasdaq 89 percent, though the Nasdaq would need to more than double from its current 2100 to match its record 5048 level reached in March 2000 (story, Page 56). Corporate profit growth is also slowing from its lofty perch of recent years as many of the gains from cost-cutting and productivity improvements are giving way to higher raw materials prices and the need to hire new workers and expand capacity.
The new year started off on a sour note, as stocks posted losses early last week. The culprit? Strong factory orders, which traders took as evidence that the economy may be growing fast enough that the Federal Reserve Board will have to step up its go-slow interest-rate-hike policy. It didn't help when minutes were released of the Fed's December meeting, which showed policymakers voicing concern about the dollar and inflation.
Another aspect of market history also is troublesome. This is a post-presidential-election year, "and those tend not to be the greatest years," says Jeffrey Hirsch, editor of the Stock Trader's Almanac. He notes that since World War II, stocks have gained a meager 3.7 percent on average during the first year of a presidential term. "During the first two years of a term is usually when you have your recessions, depressions, and wars." There is a caveat to this historical fact, however. When the same party stays in power, the market does pretty well, gaining more than 10 percent. There's one added caution, though it's one Hirsch doesn't take too seriously since he can't come up with a fundamental reason why it should be so: A year ending in "5" has not been a losing year for stocks in more than a century.
Put history aside for a moment, and Robert Sweet, economist and managing director for MTB Investment Advisors, likes today's economic fundamentals. "I think the economy will show growth of around 4 percent without any runaway inflation," he says. "You'll see the term 'not too hot, not too cold' used a lot. And I think we'll end with the market up around 6 or 7 percent." A bit more bullish is Edward Yardeni, chief investment strategist at Oak Associates. He's looking for the S&P 500 to rise to 1385 by year-end from its current 1191 and for the Dow Jones industrial average to retest its all-time high of 11,723. Key to his forecasts is low inflation--right around 2 percent or so--which would help protect the Fed from having to suddenly ratchet interest rates sharply higher. "If inflation rises significantly next year, my forecast will be wrong," he told his clients in his year-end letter.
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