Commentary; Posted: 1/22/03

Good riddance to 2002 Stock Market

Dave Purdy
Guest Columnist

Hope springs eternal as investors said good riddance to 2002 and welcomed 2003 with a dose of cautious optimism. After three down years in a row in the major market averages, investors are ready to grasp onto any piece of news that might signal an end to the streak.

And as if on cue, the Institute of Supply Management said on the first trading day of the New Year that its gauge on the factory sector of the economy jumped significantly in December.

Thatís all the market needed to hear and by the end of the day, the major market averages had recorded their third-best opening day ever.

Of course, one day doth not a year make. We still have major issues to deal with including Iraq, North Korea, Venezuela, corporate earnings (and scandals), business spending and job growth.

But as we start the year anew, investors are hopeful these issues can get worked out so the market can start a new streak ó a winning streak.

If we assume for a moment that the geopolitical issues can get worked out satisfactorily in 2003, the next biggest hurdle is to get businesses to start investing again. Business investment leads to job growth and job growth leads to consumer spending and consumer spending leads to corporate profits.

For the last 2‡ years, businesses in general cutback their capital spending and shed jobs as the technology bubble burst. Throw in 9/11, the war on terrorism, Iraq, and corporate scandals, and youíve got the recipe for corporations to be tight with the purse strings.

But that stinginess with the purse strings cannot last forever. According to Martin Barnes, editor of the Bank Credit Analyst as quoted in The Wall Street Journal, technology now makes up half of all business investment.

The problem with technology is it becomes obsolete relatively quickly.

For example, itís not uncommon for companies to have a policy of replacing their personal computers every three years. Now that weíre coming up on three years of weak corporate investment, there may be a pent up demand for new capital goods.

Another factor working in favor of a budding increase in corporate investment is Y2K. Prior to Y2K, businesses were spending like mad to get new equipment that was Y2K compliant. In many cases they found it was easier to just buy new equipment rather than upgrade existing equipment.

The buildup to Y2K is now more than three years old so thereís possibly a significant amount of business equipment that is nearing the end of its lifecycle and needing replacement.

So will 2003 be the year that the market turns up? We wonít know until the year is over but I believe some of the pieces are starting to fall into place. For example, Thomson First Call reports that analysts are forecasting a 14 percent rise in S&P 500 earnings in 2003.

President Bush is unveiling a proposed $600 billion economic-stimulus package that includes repealing personal income taxes on corporate dividends, as well as expanded child credit. Interest rates remain near historic lows. Business spending may be poised to rise as mentioned above.

And after three years of declines, the market averages are more reasonably priced.

Writer Dave Purdy is president of Wealth Management Midwest, Town Square, Forest Lake.

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