Viewpoints

Investment Outlook for 2004

By Dan Pickett (BBA '87, MS '88)
Nakoma Capital Management LLC
525 Junction Road, Suite 8600
Madison , WI 53717-2152
Phone: 608/831-8814
Email: dpickett@nakomacapital.com

After three losing years and a rocky start in 2003, the stock market ended last year showing significant gains across virtually all sectors. A good deal of this performance turnaround can be attributed to the Bush Administration's tax cuts, an accommodative Federal Reserve and the easing of geopolitical concerns.

Entering the New Year, most economists forecast a continuation of these trends. Indeed, the spread between long and short-term interest rates is at a historically high level, encouraging further growth. There are some concerns about growing U.S. deficits. So far, however, higher than forecast tax receipts have led to smaller increases than expected.

The growing deficits have contributed to weakness in the U.S. dollar, however. Down nearly 20 percent since a 2002 peak, the weak dollar should add to earnings for U.S. companies operating overseas. Of course the decline in the dollar may also lead to an increase in U.S. interest rates if foreign investors withdraw financing for U.S. deficits.

Most economists forecast earnings growth near 15 percent in 2004 and gradually rising interest rates. Given this, equity market valuations seem reasonable, although investor sentiment is quite high. Equity funds are relatively fully invested and many measures such as the put/call ratio and volatility indices suggest a higher than normal degree of investor complacency. Should this enthusiasm wane, the equity market is susceptible to a correction.

There are many reasons to be optimistic about the prospect for equity market returns in 2004. While it is unlikely that results for the market averages will match the increases of 2003, there appears to be enough momentum to sustain the improvement seen to date. Conversely, it is likely that interest rates will rise through the year, dampening returns in the bond market.

If you would like to submit a short article for the "Viewponts" section of Wisconsin Business Alumni's electronic newsletter, please contact WBA at 608/265-0575 or alumni@bus.wisc.edu. The information appearing in this column is the opinion of the author, and is not endorsed by Wisconsin Business Alumni or the School of Business .