CurrentOfferings.com Story:

Market Caps Off Sustained Rebound

By Ben White and Carrie Johnson, January 1, 2004, Washington Post

After a brutal three-year slide, the stock market staged a comeback in 2003, propelled by low interest rates, tax cuts and a return to robust corporate profits.

As the final closing bell of 2003 rang on Wall Street yesterday, the Dow Jones industrial average stood at 10,453.92, up 25 percent for the year. The broader Standard & Poor's 500-stock index finished at 1111.92, up 26 percent, while the technology-heavy Nasdaq composite index beat them all, finishing at 2003.37, a 50 percent gain.

It was the first positive year for stocks since the Internet and telecommunications-driven market bubble burst in early 2000 and the best year for the S&P since 1998. But while the market performed well, the major indexes still finished the year well shy of their all-time highs. Many investors have yet to recover what they lost in the slow-motion three-year crash. After weeks of back-and-forth, the Dow finally moved back across the 10,000 mark Dec. 11, and the Nasdaq again hit 2000 on Monday.

Last year got off to a shaky start, as uncertainty over a possible war with Iraq drove investors out of stocks and into safer investments such as bonds and gold. The market finally hit bottom in early March, then turned sharply upward when it appeared the United States would win the war quickly. Analysts said that after fears that Iraqi oil wells would be set ablaze proved to be unfounded, confidence continued to grow.

Positive news from abroad, combined with relatively cheap stock prices and a good outlook for corporate profits, lured money back into the stock market.

"Stocks prevailed over fear in 2003," said David R. Kotok, president of investment firm Cumberland Advisors Inc. "The clichéd 'wall of worry' was climbed. . . . And markets correctly anticipated the economic recovery months in advance of its happening."

As that recovery began to take hold, stock market gains continued, helped along by rock-bottom interest rates and tax rebate checks. Solid earnings growth in corporate America continued to make stock prices seem attractive, preventing any major sell-offs.

"We have had a very, very stimulative monetary and fiscal policy," said Alfred Goldman, chief market strategist for A.G. Edwards Inc. "The Fed has kept interest rates low, and the tax cuts of two years ago and earlier this year put more money in consumers' pockets. The Fed has also kept the dollar weak, which may be bad for American tourists, but it's certainly good for the market."

Technology stocks soared the highest, as investors snapped up shares in firms that survived the Internet meltdown and placed bets that economic recovery will lead to renewed spending by companies and individuals in 2004 on the next generation of computer hardware and software.

According to U.S. Bancorp Piper Jaffray Inc., share prices for companies in the information technology sector rose 44 percent through Dec. 24, the best of any sector.

Technology-focused mutual funds turned in a strong year as well, rising 56 percent as of Dec. 30, according to market data firm Lipper Inc. Overall, stock market mutual funds rose about 32 percent, according to Lipper.

And the scandals over market timing and late trading did not stop investors from moving money into equity funds. According to data from the Securities Industry Association (SIA), investments in stock funds grew by about $147 billion this year, a strong increase over 2002, when investments declined by nearly $30 billion.

Opinions among market strategists are mixed about whether technology stocks are again overvalued. Some argue that the Nasdaq could continue to rise in 2004, driven by larger companies, such as Microsoft, that tend to do well in the later stages of an economic recovery.

In fact, this has already begun to happen to some extent, according to data from the SIA. In a year-end report, the SIA noted that big companies took over from smaller ones in driving the stock market's continued advance in the final weeks of the year.

But few on Wall Street predict that Nasdaq will turn in another year of growth equal to last year's.

"Tech stocks have had a great year," said Tim Smalls, a managing director at SG Cowen Securities Corp. "They've been a market leader. Little by little the surviving companies have cleaned up the balance sheet, eliminated some of the oversupply they created and spent more time organizing their capital expenditures."

But, according to Smalls and market analysts, growth will return to more normal levels, and some investors will sell to reap profits, so share price increases will be smaller.

Stocks outside the technology sector may not rise as far in 2004 as they did in 2003 either, market experts say. At some point, perhaps in the second quarter, the Federal Reserve Board may hint that it intends to nudge up interest rates to ward off inflation. Market strategists will be listening closely when Fed Chairman Alan Greenspan testifies on Capitol Hill in February.

The market for initial public offerings remained relatively stable, with 78 IPOs in 2003 compared with 82 the year before, said Jeffrey Hirschkorn, a senior analyst for Current Offerings, a New York-based analytical firm. Offerings in the financial services sector brought investors the strongest returns in 2003, while investors mostly soured on the year's biotechnology deals. Among the most intensely watched public debuts in 2004 will be Salesforce.com, which makes software, and an expected offering from Web search engine company Google Inc.

Meanwhile, the decline of the dollar continues to create concern. The weak currency has boosted U.S. exports, but any significant move by foreign investors to dump dollar-denominated assets could mean trouble for stock prices. The euro yesterday traded at almost $1.26 to the dollar, up 20 percent this year. That gain marked the best performance for the euro against the dollar since the currency was introduced in 1999.

The rising U.S. deficit, and its impact on interest rates, also continues to create worry. Whether the economic recovery can drive up tax revenue enough to ease the deficit remains to be seen. Employment figures also will be key, as investors wonder whether U.S. consumers can keep spending at a brisk pace.

Finally, most market analysts expect that corporate profits will grow more slowly in 2004, making stocks seem like less of a bargain. But Kotok of Cumberland Advisors noted that corporate profit as a portion of gross domestic product (GDP) is continuing to rise faster than the stock market, a formula that has always led to higher stock prices. He predicted an overall market advance of between 8 percent and 12 percent in 2004, with most of the gains coming in the first half of the year.

� The New York Stock Exchange composite index rose 20.40, to 6464.00; the American Stock Exchange index fell 1.64, to 1173.55; and the Russell 2000 index of smaller-company stocks fell 8.56, to 556.91.

� Declining issues narrowly outnumbered advancing ones on the NYSE, where trading volume rose to 982 million shares, from 974 million on Tuesday. On the Nasdaq Stock Market, decliners outnumbered advancers by 9 to 7 and volume totaled 1.73 billion, up from 1.53 billion.

� The price of the Treasury's 10-year note was unchanged, and its yield rose to 4.26 percent, from 4.25 percent on Tuesday.

� The dollar rose against the Japanese yen and fell against the euro. In late New York trading, a dollar bought 107.36 yen, up from 107.06 late Tuesday, and a euro bought $1.2572, up from $1.2549.

� Light, sweet crude oil for February delivery settled at $32.52, down 27 cents, on the New York Mercantile Exchange.

� Gold for current delivery fell to $414.80 a troy ounce, from $416.90 on Tuesday, on the New York Mercantile Exchange's Commodity Exchange.

White reported from New York, Johnson from Washington.