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Optimism can be based on the underlying positive force that technology brings to the economy in the form of innovation, productivity advances, and — ultimately — rapidly rising standards of living. The transitional period from boom to near-bust in the latest economic cycle has encouraged government policies that are likely to promote faster economic growth in years to come. Fears that tax cuts will bring on budget deficits will be mitigated by stronger-than-expected economic growth, while rising economic activity will push interest rates higher and encourage the Federal Reserve to be less aggressive in stimulating the economy by holding interest rates down. An important aspect of economic expansion in 2003 will be the next phase of President Bush’s fiscal-policy initiatives. Recently, the news wires reported that the president’s advisors were pushing for a reduction in the taxation of dividends, an important factor in encouraging investment in common stocks. Companies that pay dividends may see higher stock prices because their dividends will become more valuable on an after-tax basis. Other non-dividend paying companies may institute dividends as a way to pass on profits to shareholders who previously relied on volatile capital gains as the way to profit from investing. The economic outlook remains generally positive as long as we get additional fiscal stimulus early in 2003. The interaction of stimulative monetary (low interest rates) and fiscal (tax cuts and increased government spending) policy, coupled with rising productivity, should contribute to rising corporate profits, the key element to rising stock prices. Once the real economy begins to achieve a rate of growth in excess of 3% for two or three quarters, there will likely be an increase in both short-term and long-term interest rates, probably by late 2003. While unemployment may remain stuck in the 6% range until corporate America gets back into action, this jobless level will not undermine economic growth. In fact, this is a necessary short-term characteristic of a corporate sector that is striving to return to profitability. Assuming that we get a viable fiscal-stimulus package effective early in 2003, there should be steady progress in economic growth by the third quarter of 2003. Inflation should remain low as productivity remains strong in an environment where corporations have reduced expenses to the bone. The consumer will not continue his record spending pace on autos and homes, simply because the environment has been so positive for buying on credit or for getting cash out of refinanced homes. The corporate sector should be the area of strongest relative growth next year, and stock market returns will be influenced by stock selection — not overall market participation. Companies that struggle to produce earnings growth will underperform companies whose earnings surge after two years of dismal performance. The stock market likes to see acceleration in earnings, not stability or weakness. However, a general market rally will pull most stocks along for the ride. Are investor risks looming out there? Sure. Financial markets still don't have a handle on the war on terror. While it is being waged successfully, the markets see no ultimate surrender or peace treaty. Surprise acts of terrorism may also unnerve investors and cause the markets to fluctuate in the short term. However, because of our commitment to undermine the power bases and financial support of the terrorists, the ability of terrorists to wage successful attacks will be systematically minimized. There is also an immediate need for additional fiscal stimulus. If the Bush administration cannot push through a viable stimulus package, the consumer may weaken and the economy could slip back into recession. The stock market would resume the downtrend under these circumstances. Other factors such as large corporate bankruptcies could also postpone a strong market advance. Finally, on the global stage, the economic crises in Argentina, Brazil, and maybe even Europe also threaten the financial landscape. The European Central Bank has lowered interest rates by one half of a percent, signaling a commitment to stimulate economic activity. However, the European Union has been slow to adopt stimulative measures to get their economies growing again. Budget deficits are a key concern but they may be needed to get Europe back on a growth track. Despite these concerns, stocks will do a lot better over the next two years. After a substantial bear-market decline, there's every reason to believe we're headed back up.
— Tom
Nugent is Executive Vice President & Chief Investment Officer of PlanMember
Advisors, Inc., and an investment consultant for Wealth Management
Services of South Carolina. |
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he economy
is recovering from an unusual economic slowdown induced by a powerful
wave of technological advances that rapidly transformed the U.S. economy.
And there is all the reason in the world to be optimistic about the economy
as we head into the new year. 
