There's no doubt that 2002's turbulentstock market, economic uncertainty,corporate accounting issues, and ongoinginternational concerns injected a healthydose of investor fear into the marketplace.However, at times, these fears overshadowedthe positive economic developmentsthroughout the year. While some of thesefactors continue to cloud our vision in2003, there are encouraging signs for thenew year that investors should observe.
The bad news:
In 2003, the economy should experiencemoderate growth. Looking at thenumbers for 2002, the economy grew at arespectable average rate of 3%. Thisgrowth should continue and even accelerateduring the second half of 2003, giventhe current low interest-rate environmentand the likelihood that Congress will takeadditional action to stimulate the economy.In addition, provided the recent economicrecovery stays on track, unemployment,which stayed under 6% for themajority of 2002, will continue to decline.Because of increased pressureon the dollar, inflation might increaseslightly, resulting in higher prices forimported goods.
In addition to a growing economy in2003, stocks should also strengthen.Fueled by economic recovery, the thirdquarter of 2002 witnessed 7 of 10 S&P 500sectors experiencing earnings growth. Youprobably didn't hear much about this positivedevelopment, however, since themarket and the media chose to primarilyfocus on the negative in 2002. Breakingthe past year's trend, let's give due creditto deserving developments: The thirdquarter earnings growth in 2002 is anencouraging sign for the new year.
The promising outlook for the economy,corporate earnings, and job growth,combined with the attractive value ofstocks (especially versus bonds), providesgood reason to believe that 2003 will be ayear of investors' confidence building. It'slikely that this year investors will recognizethe earnings strength of cyclical companiesand deemphasize their exposure tomore defensive sectors, such as health careand consumer staples.
SIGNS OF THE TIMES
If you own bonds, 2003 may be theyear to guard your gains. The turbulencein the equity markets has led manyinvestors to seek refuge in the fixed-incomemarket. This financial migration,combined with another round of ratereductions by the Federal Reserve, hashelped push treasury yields to their lowestlevels in more than 40 years.
Because bond prices move in the oppositedirection of their yield, bond investorsholding fixed-income securities in thisdeclining interest rate environment haveenjoyed significant portfolio gains. However,as the economy gains momentum in2003, interest rates will likely increase,leading to rising bond yields and fallingbond prices. Fixed-income investors shouldbe thinking of strategies to help guardtheir holdings from price erosion.
While fears of war, corporate wrongdoing,and stock market dips continueto plague investors, it's important theyremember that the outlook for the next12 months contains a number of brightspots. There is evidence of both sustainedeconomic growth and improvingcorporate earnings. In addition, stocksare attractively valued. So position yourportfolio to take advantage of thepending recovery.
Joseph F. Lagowski is vice president,
investments, and a fi-
nancial consultant with A.G.
Edwards in Hillsborough, NJ.
He welcomes questions or
comments at 800-288-0901 or
article was provided by A.G. Edwards & Sons,
Inc, member SIPC.