Inside the numbers: The market

Posted: Jan 25, 2005 12:00 AM

Recent surveys show that investors are growing increasingly pessimistic about the stock market and the economy in general in 2005. I've been known to be a skittish investor myself. I bailed out of the market in early 2001, then again in late 2004 after the supposed "Santa Claus rally."

 So don't accuse me of over-optimism when I say that the economy is poised to take off. I've added a dose of political sense to a quick examination of economic statistics and polling data, and following are the reasons for my bullish forecast.

 First, the polling data. Our InsiderAdvantage national surveys throughout the 2004 election season indicated that Americans were relatively optimistic the economy would reach new heights once election fevers cooled and political stability re-emerged. Public sentiment about the economy has also evened out because of the nation's improving employment numbers.

 Meanwhile, Federal Reserve Chairman Alan Greenspan -- a.k.a., the "Dr. Evil" of the economy -- actually did us a favor when he raised interest rates several times in recent memory without even the expected justification of rapidly rising inflation. Now, those on fixed incomes can finally make a little cash on traditional bank-investment funds like CDs and money markets. At the same time, mortgage rates remain reasonable, partly because of fierce competition among lenders.

 Early in the year, pessimism over the stock market can be traced to the wildly unrealistic earnings expectations of many corporations. They want every quarter's profits to exceed the previous one, forever and ever, amen. The prescription that companies must endlessly cut expenses to the bone can only go so far in appeasing the attention-deficit babies who analyze and pontificate on Wall Street. Sooner or later, they'll have to get real again with their expectations.

 In fact, the expense-cutting is winding down. And corporate America is starting to come out of its shell. It's realizing that the best way to enjoy sustained growth in both revenues and profits is for companies to invest in themselves -- in their people, products and innovations. That's what is taking place across the nation in large multinational companies, but also in small businesses.

 Now add this in: The United States has in place a pro-business president and Congress; a better handle on geopolitical problems, such as terrorism; and a perceived political mandate for its leaders (instead of a believed court-imposed coronation). All this equals greater stability and predictability for decision-makers.

 Problems loom, of course -- growing national debt and trade deficits, plus a weak dollar. All of these economic dead weights are dutifully (and constantly) highlighted by Greenspan. He loves to apply the brakes upon the first sign of economic acceleration. (We mustn't have any "irrational exuberance," right, Alan?)

 His concerns are not invalid, but they are often a double-edged sword. For example, some of our nation's best-known multinational corporations fare better when the dollar is weak. In fact, they make almost all of their money overseas and suffer substantially when the dollar is strong. You can rest assured that many of Greenspan's best pals have seen their stock values rise in recent months, and for some of the same reasons that the Fed chief so loudly laments.

 The deficit also has an upside. Yes, George W. Bush has done a good job of imitating Lyndon Johnson in trying to cure all ills with government spending. But this fiscal rashness has also pushed a boatload of contracts and cash out into the economy. Now the ranks of Congress are swelled with professed fiscal conservatives. They had to hold their tongues while the president ran for re-election. Now the path is open for them to do the dirty work of reining in spending.

 Don't expect to see the huge market gains of the late '90s again soon. That era's immature and unrealistic gold rush-style investment strategies are likely off the table for some time to come.

 Steady and sustained growth is upon us. Wall Street's spoiled brats are now seeing that companies can't be expected to perform new miracles every quarter. The wisdom of a Republican-based economic model, tempered with the realization that Congress mustn't kill the golden egg-laying goose with excessive spending, should result in an expanding economy and market -- whether Alan Greenspan keeps his big mouth shut or not.