Above-average economic growthin 2003 and a positive finishfor the markets after 3 yearsof decline have set the stagefor continued expansion through 2004.While physician-investors should be ableto take advantage of these positivetrends, they will need to position theirholdings for the possibility of risinginflation. The following are some of theperks and pitfalls that could be in storefor investors this year:
• The economy is on track to haveone of the best years of this decade.Economic growth is expected to continuethrough 2004 because of the recent federaltax cuts, low interest rates, a decliningdollar, and the growth of foreigneconomies. Consumers are more likely topurchase attractively priced American madeproducts over their foreign counterparts,thereby boosting corporate earningsand creating more jobs.
• Stocks should benefit from growthin the economy. A continual rise in consumerspending and recovery in internationaleconomies should lead to animprovement in the manufacturing sector.To keep up with consumer spending,companies have to produce more goodsand keep shelves stocked. Accompanyingthe economic recovery will be an increasein capital spending by businesses, as theylook to boost production and gain efficiency. These factors are all positives forthe market, especially for cyclical stocks,which are expected to perform well.Equity investors should be wary of theeffects of a possible increase in the rate ofinflation, as it could cause a decline in theprice of some stocks.
• If inflation rises, bonds will beaffected. The same factors that spureconomic growth and corporate earningscan also lead to an increase in therate of inflation—a condition that canpush up interest rates on bonds. To protectfixed-income holdings from pricerisk, physician-investors may want toconsider purchasing bonds with shortermaturities or buying premium bonds.Investors can also find opportunities ininvestment-grade corporates, high-yieldmarkets, and municipal bonds.
• Commodities should continue torecover. With strong economies both athome and abroad, investments in commoditiesshould continue to perform wellin 2004. In addition, the increased consumptionof basic materials from China,due to an expanding industrial sector anda growing economy, should continue tobe a boost for commodities.
Joseph F. Lagowski is vice president,investments, and a financialconsultant with AG Edwards inHillsborough, NJ. He welcomesquestions or comments at 800-288-0901 or www.agedwards.com/fc/joseph.lagowski. This article was provided by AGEdwards & Sons, Inc, member SIPC.