|S&P 500 Index*||5.08%||11.65%||26.38%||Large-cap stocks|
|Nasdaq Comp.*||2.20%||12.11%||50.01%||Large-cap tech stocks|
|Russell 1000 Growth||3.46%||10.42%||29.75%||Large-cap growth stocks|
|Russell 1000 Value||6.16%||14.19%||30.03%||Large-cap value stocks|
|Russell 2000 Growth||0.45%||12.68%||48.54%||Small-cap growth stocks|
|Russell 2000 Value||3.62%||16.37%||46.03%||Small-cap value stocks|
|MSCI EAFE||7.82%||17.11%||39.17%||Europe, Australasia & Far East Index|
|Lehman Aggregate||1.02%||0.32%||4.10%||U.S. Government Bonds|
|Lehman High Yield||2.26%||5.91%||28.97%||High-yield corporate bonds|
|Carr CTA Index||2.81%||4.55%||15.50%||Managed futures|
|3-month Treasury Bill||.||.||1.05%|
|Through December 31, 2003. *Return numbers do not include dividends.|
After a tremendous 2003, analysts of nearly every ilk are looking for another great year of gains for U.S. equities. Bullish market technicians cite two reasons for their enthusiasm. From a calendar-based perspective, stocks tend to do well in election years as incumbents try to keep investors happy by keeping interest rates low and by perpetuating economic growth. According to the Hirsch Organization, publishers of the Stock Trader’s Almanac, stocks have risen 16 times over the last 24 election cycles.
As a group, fundamentals-based market players also see a bright future for equities. After catapulting to a 7.2% increase in the third quarter, the U.S. gross domestic product is poised for further gains at least into the second quarter of 2004. Fourth quarter earnings are already expected to be stellar, interest rates are still low, and even the labor market is showing signs of improvement.
But even with this rosy scenario, market participants should consider the very real possibility that the consensus view is incorrect. In this context, there are a number of ways an investor can protect himself against a surprise in 2004 while preserving upside opportunities.
Market valuation is one place to seek shelter. With names such as Yahoo! and eBay trading at a triple-digit trailing P/Es, it is hard to become excited about Internet names from a valuation standpoint. In the stock-friendly scenario being proffered by most brokerage firms, it could very well be that 2004 is a year for value-oriented stocks–those with real earnings that trade at or near book value–than for more speculative issues. That was the case in 1992, which was the last presidential election year that followed an economic recovery and is believed by many to be a good proxy for what lies ahead in 2004.