With Dow at 10,000, many investors hope more gains lie ahead

Surging share prices reflect improving economy - and could further fuel it by putting money in consumer pockets.

What's good for American investors tends to be good for the United States economy. And vice versa.

So the major upward move of stock prices so far this year reflects an improving economy - and could feed it as consumers feel more able to spend.

Last week, the Dow Jones Industrial Average closed above 10,000 for the first time in nearly 19 months. The average first broke that psychological barrier in March 1999. After a roughly 22 percent rise in stock prices this year, American shares are worth $4.2 trillion more than last October when stock prices bottomed.

Now that extra wealth should feed back into increased consumer spending.

David Wyss, chief economist at Standard & Poor's in New York, calculates that as investors regain confidence in the value of their stock assets, they will spend about 4 percent of the extra $4.2 trillion, or $168 billion, on everything from milk shakes to brand new cars.

That would be welcome. The extra consumer spending is probably more than enough to replace the spending lost because of a slowdown in mortgage refinancings - by which millions of Americans have cut their housing costs and freed up money for other spending needs.

2004 prospects

In turn, the rebound on Wall Street is fueling hopes for more gains ahead. Many analysts expect stock prices to reflect the improving economy in 2004, though not at the rate experienced so far this year. Allen Sinai, chief economist at Decision Economics, a Waltham, Mass., consulting firm, sees a 10 to 15 percent rise as possible, for example.

The good-news cycle may also ripple into President Bush's prospects - and the impact of next year's election on the stock market. Progress in the economy can only help the president as he battles a Democratic challenger, analysts say.

In general, election years are good ones for stocks, second only to the third year of presidential terms. The recent strength in share prices is buoying hopes that this pattern will play out again.

The stock market still hasn't recovered its bear-market losses. During the 2000-2002 bear market, the S&P 500 plunged 49 percent. That's a tad deeper than the 1973-74 decline of 48 percent, but much less than the 85 percent crash in 1929 that preceded the Great Depression.

Despite being hit hard by falling stocks, many investors seem excited to reenter the market - or at least look more happily at their portfolio numbers.

Consumer and investor confidence

Consumer confidence in general has risen for three straight months, according to the Christian Science Monitor/TIPP poll. The poll's index of economic optimism hit 58.8 this month, up from 55.9 in November and higher than any month this year. A number higher than 50 indicates a positive outlook.

Poll respondents who have at least $10,000 invested in the stock market - directly or through mutual funds - are now much more likely to be buying more shares (33 percent are doing so) than taking money out of the market (5 percent).

As of last July, 47.9 percent of US households, or 53.3 million, owned mutual funds, according to the Investment Company Institute. That's down slightly from 54.2 million households in 2002. Ownership in 401(k)s or other employer-sponsored retirement plans was up a little. Ownership of funds outside these plans was down a bit.

For investors abroad, its a different story. They are concerned by the fall in the value of the dollar. Foreign net purchases of US assets dropped sharply from $62 billion in August to $16 billion, notes an analysis by Merrill Lynch.

Some American investors, seeing the way the falling dollar boosts the relative value of foreign investments, have been putting money into global stocks.

The Fed factor

Indeed, there are no guarantees that US stocks go up next year. One peril would be if the Federal Reserve decides the economy is growing too fast and raises interest rates to slow it down and deter a rebirth of inflation. In Federal Reserve policy minutes released last week, there was a hint that interest rates might not rise anytime soon. That's what sent the market soaring.

Corporate profits at $1 trillion

Corporate profits, which fell by 2.2 percent in 2000 and 7.2 percent in 2001, rebounded 7.6 percent in 2002. At the current rate of growth, profits will rise at least 19 percent in 2003, notes Brian Wesbury of Griffin, Kubik, Stephens & Thompson, a Chicago brokerage firm. For the first time, pretax profits in the third quarter exceeded $1 trillion at an annual rate.

"With profits up as a share of GDP, the stock market appears undervalued," he and an assistant, Maria Forres, write.

Others disagree. The S&P index's ratio of expected operating earnings to share price now stands at 18, calculates Wyss. That's less than P/E ratios as high as 26 during the boom. But it remains higher than the average during the 1960s through the 1980s. "We probably have one more good year in the stock market," says Wyss. "But the 1990s are over - sorry."

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