Saturday, January 01, 2005

The economy is strong, and getting stronger...

...or so say the completely disinterested cheerleaders with major media outlets and Wall Street counting houses:

Late Stock Market Rally Makes 2004 a Winning Year

"As 2004 ended, investors had plenty of reasons to breathe sighs of relief.

The war in Iraq raged on, the Federal Reserve began raising short-term interest rates, oil prices topped $55 a barrel, the presidential election went down to the wire and the stock market spent most of the year in the doldrums, yet the three main market gauges finished up for the year yesterday and are at their highest levels in three and a half years.
The Standard & Poor's 500-stock index was the best performer for the year, rising 9 percent, followed by the Nasdaq composite index, which climbed 8.6 percent. The Dow Jones industrial average rose 3.1 percent. All three indexes slipped slightly in light trading yesterday.

Before the presidential election, the Dow and the Nasdaq were down for the year, while the S.& P. was up just 1.7 percent. The 7.2 percent surge in the Dow after Nov. 1 was the fifth-best postelection rally in a presidential year since 1900 and the best since 1952, according to Ned Davis Research. For the Nasdaq, the 9.9 percent postelection climb was the second best since the index began in 1971 and the strongest such rally since 1992.

The year-end rally has fueled optimism for more of the same in 2005 : stocks up in the high single digits and corporate earnings growing at about the same pace.

'We are optimistic,' said Timothy J. Leach, chief investment officer at U.S. Trust. He is expecting only a modest increase in interest rates and 'not a huge amount of inflationary pressure.'

A look at market history also favors a good year. The first year after the 1984, 1988 and 1996 elections, in which the presidency did not change party, was great for the stock market, with an average return for the S.& P. of 28.2 percent. And for years ending in five, the average gain for the S.& P. is 28.5 percent, going back to 1935.
There are many intangibles that could quickly change the outlook for 2005 for the worse. The war in Iraq and terrorism are the two most obvious unknowns. A weakening dollar, if it got out of hand, could be a threat to both the stock and bond markets. The dollar fell for its third consecutive year against major currencies in 2003, including a 7.6 percent drop to a record low against the euro on Dec. 30.

The record federal budget deficit and the record current-account deficit - the broad gap between exports and imports of goods and services - are already worrying some investors. And interest rates are expected to rise further this year, as the Federal Reserve continues pushing its short-term interest rate higher.

Then there is some negative market history: Since World War II, the Dow has fallen an average of 1.3 percent in the first year of Republican presidencies. "

DJIA, 1/20/01: 10,587.60
DJIA, 1/31/04: 10,783.01

NASDAQ, 1/20/01: 2,770.38
NASDAQ, 12/31/04: 2,175.44

Yeah, I can just feel the forward momentum. Or maybe it's just freedom on the march in Iraq that I'm feeling.


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