Market has worst 3-year performance since 1939-41

By Amy Baldwin
Associated Press

NEW YORK — Investors depressed by three years of losses on Wall Street might take heart in what some analysts are expecting in 2003: A return of the bull.

With positive reports on earnings and the economy occurring more often, and fewer new instances of corporate scandal, the market's optimists believe stocks will start charging again. But other more cautious analysts warn against unrealistic expectations — a bull in 2003 will likely be tamer than the one that sent stocks roaring in 1999.

Charles H. Blood Jr. is among the most upbeat about Wall Street's prospects.

"We are now in the first part of the bull market," said the senior markets analyst at Brown Brothers Harriman & Co.

Brinker Capital also expects a robust year on Wall Street. "We think double digit returns are a real possibility," said Barker French, the company's chief investment strategist.

Wall Street would certainly welcome a positive year after a dreadful 2002. The Dow Jones industrial average suffered an annual loss of 16.8 percent, its worst yearly decline since 1977 when it sank 17.3 percent. The 2002 results gave the Dow a three-year drop of 27.5 percent.

The Nasdaq composite index fell 31.5 percent, in its second worst year behind 2000 when it dropped 39.3 percent. For the last three years, the Nasdaq lost 66.9 percent.

And, the Standard & Poor's 500 index slid 23.4 percent in its worst year since 1974 when it lost 29.7 percent. The S&P sank 40.1 percent over the past three years.

Analysts said the market has several factors in its favor going into 2003, among them improving earnings, a strengthening economy and interests rates low enough to motivate companies and individuals to spend more.

Wall Street also has history on its side. Four-year slides are rare — so much so that the Dow has seen only one, which spanned 1929 through 1932. And, there have been only two three-year declines, 1901-1903 and 1939-1941.

And, after three years of declines, it won't take much to qualify as a bull market.

"We have been saying it will be the year of the bull for the last three years. Eventually it will be. ... I do think next year will see some positive returns for the overall market," said Robert Froehlich, chief investment strategist for Deutsche Asset Management.

While many analysts were bullish going into 2002 and 2001, Froehlich said this year is different for two reasons: Lower interest rates — the result of a total of 12 cuts by the Federal Reserve — have had more time to work their way into the economy and the new Republican-controlled Congress is expected to reduce taxes for businesses and individuals.

"That presents a much different backdrop than we have had in the past three years," he said.

Analysts are also optimistic that greater pressure on companies to report accurate earnings will restore investors' faith in the market and prompt them to buy stocks with renewed enthusiasm. At times this past year, investors were so shaken by corporate scandals that they ignored signs that the economy was strengthening.

"We had an opportunity to really see the market rebound (this year) ... but there was no confidence in earnings because of corporate fraud issues. That is what put us into the third year of declines," said C. Kim Goodwin, chief investment officer at State Street Research. "I am optimistic about next year because investors are more confident."

She sees the market posting a 10 percent return next year, in line with the historical average of the broad market represented by the S&P.

Brown Brothers Harriman's Blood is more bullish, forecasting percentage returns in the high double digits — about 20 percent for the broad market and 24 percent for technology, where stock prices are extremely low and in many cases are under $10 a share.

Froehlich, of Deutsche Asset Management, predicts tech will rise at least 10 percent next year, possibly 20 percent, because of low stock prices and the demand for new products. The technology sector has been hit particularly hard by the market downturn.

"With stocks down 70 percent, you have a pretty good floor to work from," he said, adding that throughout the bear market companies and individuals have put off buying new computers and that there is a great deal of pent-up technology demand that could be released.

The average age of computers in the United States is 1.6 years, the highest it has been in eight years, Froehlich said. "That has always been an extremely bullish sign," he said.