Market gains should continue during 2005 |

Market gains should continue during 2005

Richard Loth

For stocks, 2004 was a good year. Using the Standard & Poor’s 500 Stock Index as a measure, 2004 produced a total return (price appreciation + dividends) increase of +10.88 percent. The “total market” Dow Jones Wilshire 5000 Index did even better, generating a total return figure of +12.62 percent. Compared to historical market returns, the past year’s results were very good and should make investors smile.Of course, once we celebrate the new year, all attention is immediately focused on what’s going to happen during the next 12 months. Take your pickI’ve sifted through dozens of market forecasts for 2005, and, as usual, there’s something for everybody – pessimists and optimists – to choose from. My take is that the 2005 market performance will look a lot like 2004, but probably be just a bit, not much, more subdued. Let’s see if in 2005 the S&P 500 Index total return comes in at a nice neat +10.00 percent and the DJ Wilshire 5000 Index at a respectable +11.00 percent gain.Here’s what some of the experts have to say about the economy and the market in 2005.– Wall Street Journal: This year, the consensus outlook for the WSJ’s 56 economists on the economy and the investing environment indicates that “the U.S. economy will perform well in 2005 … with modest but healthy growth, subdued inflation and only slight rises in interest rates.” The survey averages call for a moderate annual inflation rate of 2.5 percent; decent GDP growth of 3.5 percent; moderating oil prices in the $35 per barrel range; with short-term interest (3-month Treasury) at 2.08 percent and long-term interest (10-year Treasury) at 5.14 percent. If this scenario plays out, it’s good news for investors. — Value Line Investment Survey: The VLIS ends the year 2004 with a note of optimism by concluding that “on the whole we think 2005 will be a reasonably good year for the stock market. Our 2007-2009 forecast is even more positive, as it calls for the average price of the Dow Industrials to be close to 16,000, or within a range of 13,500 to 18,000.” — Standard & Poor’s: S&P has a target price for its 500 Index of 1,300, which would be up about +8.00 percent from the year-end 2004 reading of approximately 1,200. If we add in an average dividend yield of, say, 1.80 percent, we get a total return figure close to +10.00 percent. — Morningstar: Going into 2005, is the market overvalued? Morningstar’s Pat Dorsey provided some interesting perspective in a Dec. 29 article, “A Less-Bearish View of the Market.” While many pundits claim the market is “egregiously overvalued,” her take on the S&P 500 Index is different. She writes that “most top-down views of the S&P 500 peg it as very overvalued, while our bottom-up analysis … concludes that it’s either within shouting distance of fair value or mildly overvalued.”– Merrill Lynch: The nation’s largest retail brokerage firm is taking a cautious posture on stocks in 2005. In brief, it is advising investors to “become more defensive and diversified across asset classes and regions.” Roughly translated, ML is telling us to be careful where we put our chips and to spread them around.– Peter Eliades, Stockmarket Cycles Newsletter: Mr. Eliades’ newsletter takes the position that price movement in the stock market is related to repeating cycles. Because this year ends in five, investors are in luck. Beginning in 1905, Eliades reports that “there has never been a down year for the Dow Jones Industrial Average for a mid-decade year ending in 5.” Even better, the annual average gain for those years in the DJIA has been +38.5 percent!Borrowing a line from the “My Fair Lady” musical, “wouldn’t that be loverly.”The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing, an independent registered investment adviser. Loth can be reached at 827-5591 or Colorado

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