This year has provided a lot of encouragement for investors. A bull market hoofed its way through all the major stock indexes, boosting the Standard & Poor’s 500 and the Dow Industrials some 12% or more by the end of August, and treating Nasdaq investors to a gain of more than 30%. The good news aside, investors still have reason to feel apprehensive. They remember the sheer ferocity of the bear market that ended earlier this year — it lasted about 31 months and ripped 49% out of the S&P 500 alone, making it the second longest and most volatile bear market we’ve seen since World War II. At the three-year anniversary of the end of the prior bull market (March 2000), S&P investors had suffered through a 16% compound decline each year.
Now, as we approach the end of 2003, there are mixed signals surrounding both the U.S. economy and the equities markets. Because of these mixed signals, BLACK ENTERPRISE decided to pick the minds of market observers and money managers alike, looking for clues as to what might lie ahead. Using the guidance of these investment professionals, we sifted through the stock and mutual fund markets with a series of screens. Our goal was to find investment opportunities — stocks and funds alike — that would encourage those who may have suspended their investing to get off the sidelines and back into the financial markets.
A BULL WITH LEGS?
A bull market needs at least three legs to stand on: (1) company shares that have climbed for extended periods due to rising profits, or what Wall Street calls earnings; (2) big stock market gains that occur when investors don’t get lured away by sure returns from the bond market or other fixed income holdings; and (3) reasonably valued (or even cheap) stocks, compared to historical averages, that give the market a greater chance to climb.
Over the past few years, a recession has hampered corporate profits. However, indications are that the U.S. economy is starting to rise from its slumber, thanks to aggressive efforts by the Federal Reserve to stimulate business activity. This past August, the Conference Board reported that its Index of Leading Economic Indicators, which measures where the nation’s economy is headed in the next three to six months, rose for the fourth month in a row, reaching their most favorable levels since the recession started two years ago. “We believe that a growing economy causes earnings to rise, and [there are] signs [that] the massive fiscal and monetary stimulus will trigger economic growth and consumer spending as well,” says Sam Stovall, chief strategist for Standard & Poor’s. In turn, a strong economy should trigger a 17% year over year increase in operating earnings for the S&P 500 by the end of 2003 and a 13% increase by the end of 2004, says Stovall.
Also, recent interest rates have given stock market investors reason to be cautiously confident. Low interest rates have spurred companies to borrow and expand, which should help pull profits