The Bulls Of 2004?

Jobs remain tight, and employers are still plenty stingy with raises. Yet this is proving to be the most prosperous holiday season in four years. After all, the stock market is flying, and the economy and corporate profits are growing briskly. Still, better times don't mean that stocks are a lock for 2004.

The big mistake many folks will make in coming months is jumping back into the market in the wrong sectors as they begin to feel the recovery on a personal level through, say, a bonus, a raise or a new job or simply a heightened sense of job security. Such developments tend to come after companies are already on the mend and after an awful lot of good news has been factored into stock prices. Consider that while you were logging 14-hour days at the office and repeatedly refinancing your house to make ends meet, the stock market was on a tear. The Dow is up 41% from its low 14 months ago, the NASDAQ up 75%.

If you were scared out of your stocks during the bear market, no doubt it's time to suit up again. This recovery is real. But it's far too late to pile in indiscriminately. Tobias Levkovich, a U.S.-market strategist at Smith Barney, figures the major stock averages will end the coming year flat or slightly lower as investors wait for the economy to catch up with stock prices. That's no sure thing, given that the stimulative effect of lower taxes and falling interest rates will run its course early on.

That doesn't mean you can't make money in stocks. Other analysts are more bullish, and even Levkovich believes that some sectors will do well. He expects around midyear a massive shift out of economically sensitive cyclical stocks like technology and basic materials (Alcoa, Dow Chemical, International Paper) into defensive stocks like drugs, foods and beverages. Why? Defensive stocks, which are less vulnerable to the ups and downs of the economy, lagged badly in '03, rising just 8% on average. They now look relatively cheap next to tech (up 40%) and basic materials (up 30%). And as it becomes evident that the expansion is on track and interest rates will move higher, threatening the earnings of cyclical companies, defensive stocks will come into favor. Another likely shift will be out of small stocks, which do best early in a recovery, and into large stocks, which have lagged for three years.

So don't be in a hurry, and don't chase what has been hot (always good advice). I'm a fan of index funds, but they won't serve you well if half the market falls and half rises. Start now and build exposure to large, defensive consumer stocks like Pfizer and Anheuser-Busch. Fund investors won't find a lot of managers who have invested in these laggards; most funds are playing the cyclical theme, which could work a while yet. But Exeter Tax Managed and AmSouth Select Equity funds are loaded with consumer-goods stocks, making certain that when the shift comes, they'll be ready.