2004 Review / 2005 Preview

The final week of the year saw the Santa Claus rally fade as the Dow fell 44 points. The Blue Chip Index, while finishing out a strong December was up just 3.1% for the year. The NASDAQ added another 15 points for the week and closed out the year with a 8.6% gain. The S&P 500 rose less than 2 points last week, but was up a respectable 9% for the full year. The Russell 2000 again was the clear winner with an impressive 17% gain for the entire year, outperforming all the major indexes, but adding only 0.3% for the week. Once the election was over in November, the post-election rally turned what was looking like a flat 2004 into another year of solid gains.

During 2004 there was an overwhelming amount of good economic news. However, most of these positive trends were obscured by political rhetoric during the election year. The U.S. economy is producing more than ever, and more per person than ever. This includes manufacturing output as well. Some of the facts showing the strength in the US economy are as follows:

• Real GDP is at a record level.
• Real per-capita GDP is at a record level, as real GDP has outstripped population growth of 1%.
• Real GDP rose at a 4.0% rate through the third quarter of 2004 (most recent data available), well above the 3.0% average growth rate of the past ten years.
• Productivity is at record levels, up 3.1% over the past year.
• Industrial production is at record levels and up 4.2% from a year ago. The US economy is producing more than ever, and more per person than ever including manufacturing output.
• Home ownership rates hit record levels in 2004, and are up significantly from 2000, a supposed boom year.
• Employment, as measured by the household survey, is at record level.
• Corporate operating profits for Q4 will hit record levels, and are up 16% over the 2003.
• The core rate of consumer inflation is a very tame 2.2%.
• Ownership of fixed assets, including homes, computers, software, autos, etc., are reaching record levels.

There is simply no denying that the U.S. economy is producing at record levels and growing well above historical trends. Both corporations and individuals are benefiting from the record profits with levels of home ownership and other assets continuing to rise.

The question serious investors are asking: Can the stock market put in another up year in 2005?

Bullish sentiment is currently high at 62.9% and is a contrary indicator. Historically the market averaged a 28% return in the year following an incumbents re-election based on the S&P 500. Seasonal trends are currently favorable through April 2005. The Tech Sector as we have previously mentioned is a key to the staying power of the market, specifically the Semiconductor (SOX) stocks.

Companies reporting earnings this week are scarce, with Walgreen (WAG) and Accenture (ACN) being the only large companies to report. December sales figures being released this week by Circuit City (CC), Best Buy Inc. (BBY), Ford Motor (F) and General Motors (GM) will shed light on the strength of Q4. The much anticipated Computer Electronics Show in Las Vegas runs from January 6th through 9th. Many companies unveil new products as well as new alliances during the show.

Friday's December Employment Report will be the most anticipated release for the week. An increase of 175,000 new jobs is expected for December. The ISM Services Index will be released on Wednesday. There was more than enough negative political talk aimed at the condition of the US economy in 2004 for obvious political reasons. The facts indicate otherwise. The U.S. economy is at record levels, and growing at a 3% to 4% rate, and is the envy of the industrialized world. The momentum from the current strength should carry into 2005.

Stay tuned!