NEW YORK (CNN/Money) - Making predictions on the stock market is the equivalent of playing penny ante poker. There's so little downside to being wrong that you can't help but bet.
So here goes: The market will rise by 20 percent in the first half of 2004, but then those gains will fade. The S&P 500 will close the year up 11 percent from where it finished 2003. People will remember the forecast (especially since I'll remind them) if it's right. Most will forget it if it's wrong.
Probably what's more important for investors to think about, rather than such made-up market predictions, is what some of the big stories are going to be in 2004 -- where the bulls and the bears are going to meet and do battle. Here are three to watch out for.
Housing gets hurt?
Heading into 2003, just about everybody expected the frothy pace of home buying -- which some labeled a bubble -- to slow down.
Instead, a drop in interest rates to 40-year lows sparked a frenzy in the housing sector, sending home sales to record levels over the summer. Home building stocks, which many investors were betting against heavily, doubled in price.
Yet as we enter 2004, it looks like the slowdown has finally come. Mortgage activity has fallen off markedly, sales have slipped from their highs and the rise in home prices has slowed.
The pullback in housing activity will act as head wind for the economy, points out Goldman Sachs economist Jan Hatzius, first because construction will slow, second -- and more importantly -- because mortgage refinancing won't be padding households' wallets like in 2003.
The slowdown will make home building stocks a focus in the coming year. Bulls say the builders aren't so prone to boom and bust as they were before, because they have learned to manage their inventory of new homes more closely. Bears say that they heard this same argument 20 years ago, and it's as wrong now as it was then.
One factor that not many people are talking about: Even though builders may have kept their inventory of new homes low, they have also been loading up on property. Credit research firm Gimme Credit believes that Lennar, in particular, could find itself sitting on an excess supply of land when housing slows.
The Wal-Mart backlash
Complaints about the "Walmartization" of the U.S. economy -- where highly skilled manufacturing jobs get shipped overseas, and U.S. workers are forced into low-paid jobs as retail clerks hawking foreign-made wares -- are growing.
For the world's biggest store, being a political target in an election year is not good news. It is already under fire for using contract cleaning crews made up of illegal immigrant workers. Most of the Democratic field is solidly in the protectionist camp, and the Bush White House, with its tariffs on steel (now sunsetted) and Chinese textiles, also gives a sympathetic ear to U.S. manufacturers. Most important, many Americans are making a connection between the store that ran out all the competition in town and the shuttering of the manufacturing plant that was the town's big employer.
How will Wal-Mart cut off the criticism? It could begin buying more domestically made products. It could raise salaries and benefits. Both of those things, unfortunately, would also cut into Wal-Mart's profits and they still might not prevent the backlash. The Wal-Mart era may be coming to an end.
An eye on rates
As he does every year, at the beginning of 2003 Morgan Stanley strategist Byron Wien published what he thought could be the 10 surprises for the year. As is often the case, he got a lot right.
Wien predicted that the economy would confound "double-dip and deflation worry-warts," that consumers would keep on spending and that business spending would rebound. Gross domestic product would grow by 4 percent for the year.
Given that surge in economic activity, and given growing balance-of-payment and Federal deficits, Wien also predicted -- quite naturally -- that the 10-year Treasury yield would move toward 5.5 percent. That would put valuation pressure on stocks in the latter part of the year.
That was dead wrong. At 4.25 percent, Treasury yields aren't much higher now than they were at the beginning of the 2003.
But the factors that kept the Treasury yields low may fade in 2004.
First off, the Fed is likely to remove its promise to keep rates low for "a considerable period." Even absent worries over inflation (which are mounting) it seems prudent for the Fed to up the overnight rate from its current one percent during these good times so they have more rate cuts in their quiver for when the economy struggles again.
Second, the central banks of China and Japan may not be the big buyers of Treasurys that they were in 2003. China, in particular, seems likely to revalue its currency higher. That would curtail its demand for Treasurys.
If Treasury yields rise, they may become a more attractive alternative to stocks for many investors. Could the valuation pressure on the market that Wien expected at the end of 2003 come in 2004?
Happy New Year.
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