Jewish World Review Jan. 7, 2003 / 4 Shevat, 5763
The only thing certain is uncertainty
http://www.jewishworldreview.com | Last year was a dismal year for stocks. The major indexes fell for the third straight year, making this the worst losing string since 1941. For the 12-month period, the Dow lost 17 percent, and only three Dow stocks ended the year higher than they started it: Eastman Kodak, Procter & Gamble and 3M. Dow stocks Intel and Home Depot tumbled 50 percent and 53 percent, respectively.
The S&P 500 fell 23 percent for the year. The Nasdaq tumbled 31 percent. Among the Nasdaq's hardest-hit sectors were genetics, down around 60 percent; fiber optic parts, down nearly 70 percent; and fiber optic networks, down 85 percent. According to Lipper, the average diversified U.S. stock fund fell 22 percent in 2002.
Let's hope the year ahead will prove to be a better one for both the markets and the economy.
I asked Wall Street veteran Vince Farrell, chairman of Victory Capital Management, what he thinks the biggest business stories will be in 2003. Farrell says he hopes there will be a revival of capital spending, and he thinks there will be. He explains that capital spending has been in the doldrums for so long that "stuff is just wearing out and manufacturers are going to have to replace some of that."
In fact, stronger business spending may be the key to keeping the economy moving forward. Farrell does not think auto sales can continue to be so strong, and he thinks real estate prices will continue to advance, but at much more moderate levels.
"Since consumer incomes are still rising - last year they were up about 4 percent - I think the consumer is likely to maintain a level of spending that's good for the economy, but I don't think the consumer can take it to a new level," Farrell said. "That's why capital spending has to kick in."
Farrell also hopes we'll see a decline in the price of oil. "If oil stays where it is right now, which is around $32 a barrel, then you're really going to pinch the consumer," he said. "Every dollar increase in the price of oil is about a $7 billion hit to the American consumer. So if prices go from $25 to $32 on an annualized basis, that's $49 billion. And that's effectively a tax hike, because it hits the consumer right away."
As for stocks, Farrell predicts we'll see modest returns, and it will be much more of a stock-pickers' market. "Stocks right now are not cheap, historically, for the end of a bear market," Farrell said. "At the end of the year if we have a low double-digit return, we should be very, very thankful."
Farrell isn't the only respected market watcher who's being cautious about the year ahead. Gail Dudack, the chief investment strategist at SunGard, predicts that the S&P 500 will end the year at around 965 - a gain of just 7 percent from its current level. Merrill Lynch's Richard Bernstein has a year-end target of 860, which would actually be a slight decline. But Joe Battipaglia of Ryan Beck says the S&P could climb to 1150 - a gain of more than 20 percent.
Only one thing is certain: This period in our economic and market history continues to be stubbornly unpredictable - and any sustained gain in stocks will be a welcome turn of events.
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12/30/02: No need to be so negative as new year approaches