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January 6, 2004
There is still a lot of chatter about stocks and the market being overvalued, but there are also people who have different ways of looking at the same data and differing opinions of the outlook for the economy, corporate revenue growth, and corporate earnings over the coming year and beyond. As a general rule, the stock market will tend to look ahead 3, 6, 9, or even 12 months. About all we really know for sure is the economic growth will be uneven, revenue growth will be uneven, and earnings growth will be uneven, but all three will probably be trending up over the full year. Each company will have its own quirky path through this uneven landscape, with some companies stumbling or even failing even as others zoom ahead. We’re bound to have some soft patches in 2004 as different parts of the economy catch up at different speeds and sometimes pause to digest prior rapid growth. While earnings growth is a key factor in determining stock prices, perception of future earnings growth is also a key.
But as important as earnings are, it is ultimately the law of supply and demand that will determine the path of stock prices. Money flows in or out of stock mutual funds will be a key factor in the market trend. Despite the mutual fund scandals, inflows have continued, albeit at a more subdued pace. Mutual fund inflows may pick up more strongly as employment, income, and 401(k) contributions rise. Foreign money flows are a wildcard, but most of the conservative foreign investors have probably stayed away so far anyway, so there is little reason to expect much in the way of foreign outflows from U.S. stocks, despite all the chatter about the dollar and the trade and federal budget deficits.
Some stocks will zoom ahead on anticipation of future recovery and others will lag until investors are convinced that earnings are really sustainable. Some stocks will fall victim to the traditional “buy the rumor, sell the news” maxim and do well in anticipation of earnings improvement and then falter and decline even as strong earnings finally become realized.
Part of the rise or fall of stock prices in any short period is due to the “trading froth” caused by traders and short-term speculators who push the market up further than its core trend or below that trend, but this trading froth will tend to reverse and swing the other way within months, weeks, or sometimes even days.
The bottom line: The major market indices could end 2004 up or down for the year. Nasdaq could end down as much as 20% (to 1,600) or up as much as 60% (to 3,200), depending on the robustness of business spending in Q3 and Q4. The midpoint of that range is 2,400, or a narrow range of 2,200 to 2,600. If you have to press me, my single-point target for Nasdaq is 2,800, a 40% gain.
Updated: January 12, 2004 08:45:23 AM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology