Regardless of what happens in thepresidential election in November,there remains a lengthychecklist of worries. Gauging how thesegnawing problems will pan out and howthe stock market will react may be the keyto investing success over the next year.
According to a recent report, for many financial gurusthe real key is the economy. Global eventsmay rock the markets from time to time,but if the overall economy doesn't shiftinto high gear over the next few months,there may not be much for the market tocelebrate, no matter what happens on thepolitical front. Right now, signals aremixed. After showing signs of coming tolife, the economy turned in some sluggishnumbers over the summer, for both jobcreation and overall growth.
Shaken and Stirred
Closely tied to economic growth is anupward trend in corporate profits. So far,it has been a mixed picture, as some companiesreport an uptick in sales and netincome and others post disappointingnumbers. For many Wall Street watchers,the recent 14.9% annualized increase inearnings for S&P 500 companies may notbe as good as it appears to be. That'sbecause it's actually down from the 20%average over the past year.
And when it comes to corporate profits,the future isn't looking that rosyeither. After a predicted 15.8% increasein earnings for the 4th quarter, US economistsare looking for a 10.2% boostnext year. What it boils down to for theaverage investor is that quarterly earningsreports will probably cause evenmore volatility than they usually do.
What happens in Iraq and elsewherein the war against terrorism could spookor spark the markets. If there are nomajor terrorist incidents, that could bodewell for stocks over the next year. Amajor terrorist strike, however, couldshake the markets badly.
What happens in Iraq will also affectthe price of oil. Many experts figure thatabout 25% of the price for a barrel ofcrude is a "terror"premium that willfade if the situation in Iraq becomesstable. Also, if the Iraqi elections scheduledfor January 2005 come off with nomajor hitches, there will be an improvementin market psychology.
Stocks are getting cheap again, someWall Street analysts say; meanwhile, otherWall Street analysts say that they aren'tgetting any cheaper. The price of stocks inthe S&P 500 is actually higher than its historicalaverage, but still way below theprice during the heady years of the technologybubble. Those who see that numberas a positive sign say that a combinationof low inflation and economic growthmakes stocks attractive.
Inflation may also play a role in the scenariofor the market. If the fed raises interestrates again and the job market heatsup, inflation could become a factor. This isespecially true if oil prices don't back downfrom their current levels. High Inflationrates have historically been a negative forthe market.