By Arnie Kaufman
Although the last month of the year is usually a good one for equities, 2002 proved to be an exception. From 1928 through 2001, the S&P 500 gained an average of 1.6% in December. But in 2002, the index declined 6% during the month, a fitting end to a dismal year for stocks and the worst final-month performance since 1931.
The year-end rally never materialized because Americans were preoccupied by the looming war with Iraq, the latest North Korean efforts to build a nuclear arsenal and the ongoing stalemate in Venezuela.
The three-year toll on investors' wealth has been staggering, with the "500" down 40% from the end of 1999. Already, some pessimists are predicting a fourth yearly decline for stocks. We don't see it because both geopolitical and economic conditions are more favorable now than they were when the market last declined for three consecutive years.
The last three-year collapse in stocks ended in 1941 when the U.S., not yet a global power, was already at war. Although the war drums now are sounding loudly, there remains a chance, albeit slight, that military action can be avoided. On the domestic front, both unemployment and inflation hovered just below 10% in 1941 vs. 6% and 2.2%, respectively, at the end of 2002. Despite a plethora of domestic and foreign woes at the start of World War II, the S&P 500 gained more than 12% in 1942.
As we start the new year, monetary stimulus is already in place, thanks to the Federal Reserve. And with the 2004 election on the horizon, Congress and the Bush Administration are readying fiscal stimulus to add to the mix.
We expect 2003 to end with the S&P 500 some 16% ahead of where it stands today. Some currently depressed stocks are likely to do even better. To take advantage of the gains we see ahead, keep 65% of investment assets in equities.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook