As we get set for the new year, things look good for Wall Street. Still, there are hurdles.
December 26, 2003: 2:38 PM EST
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - As they ring out 2003, investors have few reasons to complain.
This year has been very good to them after all -- better, really, than what most people reasonably expected. The war in Iraq was blessedly short. The economy gained traction and, thanks to the tremendous spurt of growth in the second half of the year, the jobs picture is finally improving. There were scandals, sure, but compared with the shenanigans uncovered in 2002, they were small potatoes. Profits came back.
And, of course, the stock market surged, with the Dow Jones industrial average picking up 24 percent, the S&P 500 tacking on 25 percent, and the Nasdaq surging 48 percent, as of Friday's close. After three years of heavy losses, these gains are sweet indeed.
For the moment, at least, it looks like that sweetness can continue into 2004. January is typically a good month for stocks, thanks to an inrush of money into mutual funds. Given this year's market performance, households may well allocate more money than usual to equities. Strong fourth-quarter earnings could also give stocks a boost.
And yet, some investors worry that the stock market could be in for some trouble.
"You could characterize me as a very nervous bull," said Bollinger Capital head John Bollinger. "I think the market is running out of steam."
A few things are bugging Bollinger.
First off, he thinks valuations are excessive, and history says that usually when major new bull markets start, stock prices are downright cheap. This suggests that 2003's stock market rally may be fleeting -- sort of like the many rallies that the Dow saw during the 1970s or, for that matter, like Japan's Nikkei has seen since it topped out in late 1989.
He also worries the market has gotten too complacent. In the options arena, implied volatility has fallen sharply, indicating that few investors see much need to hedge against a drop in stocks. Such a lack of nervousness often means stocks are vulnerable to shock.
Finally, Bollinger worries that too many investors (himself included) share the view that stocks will do well in the first half of the year, and poorly in the second half. That means that a lot of people are nervously eyeing the exits, and that as soon as a few people get up from their seats there could be a rush to sell.
Pass the baton
It doesn't look like the economy is going to be providing investors with any excuses to sell in the first part of 2004, however. If anything, according the Lehman Brothers chief U.S. economist Ethan Harris, the risk is that current forecasts of growth of about 4 percent are too low.
But the quality of growth will be different from what we saw in 2003, when tax cuts and heavy mortgage refinancing activity gave households money to burn.
"Everyone is all zeroed in on the consumer now, but the truth is that the consumer isn't the driver now," said Harris. "Confidence is picking up, but still at average levels. Wage growth is slow and the bulk of the tax cut is already in place. Finally, with all the debt people have taken out over the past several years the burden of paying monthly bills is leaving less for discretionary spending."
Fortunately, businesses appear to be picking up the slack, rebuilding inventories and once again laying out cash on new capital equipment and expansion plans.
Key events in the week ahead
- On Tuesday, the Chicago Purchasing Managers' Index is expected to fall to 62.0 from November's level of 64.1 percent, showing that manufacturing activity in the Midwest cooled in the month of December.
- The Conference Board's consumer confidence index for December, also due out Tuesday, is expected to fall to 91.0 from its November level of 91.7.
- Economists expect November existing home sales figures, also due out Tuesday, to hold at 6.35 million, the same as in October.
- Markets are closed Thursday for New Year's Day.
- Automakers release December car and truck sales throughout the day Friday. Sales in November hit an annual rate of 13.5 million for cars and trucks.
- The Institute for Supply Management's services index, due out Friday, is expected to slip to 61.0 for December from November's 62.8. Any number above 50 signals expansion in the service economy.
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