The Surprises of the New Year - The Surprises of 2003
Morgan Stanley
1. The United States equity market defies the return to-the-mean, modest-return pundits and surges more than 25% during the
first half of the year. A Teflon-like dollar draws support from stronger-than-expected earnings growth and a recognition of
America’s economic, political, and military strength. Foreign capital inflows surge and individual investors start to buy
again.
2. The United States economy confounds double-dip and deflation worry-warts and shows 4% real growth in 2003.
Consumers hold their own and capital spending rebounds. Inflation moves higher and the Federal Reserve increases short-term
rates 100 basis points in the second half. Yields on 10-year Treasuries move toward 5.5% as the balance-of-payments
deficit approaches $600 billion and the federal deficit threatens to reach $200 billion. The US stock market comes under
some valuation pressure in the second half, but still closes strongly positive for the year.
3. Japan finally seems serious about implementing financial reforms. Government support helps the banks there face up to
non-performing loans, import barriers are lifted, profits begin to recover, and the Nikkei 225 climbs to 11,000. Japanese
Prime Minister Koizumi proposes an historic free-trade agreement with the new Chinese leadership. Asia becomes the
new engine of global growth, pushing the US into second place.
4. Starting with France, several member countries lose confidence in the European Monetary Union and threaten to pull out.
They believe Germany, once the economic envy of everyone on the Continent, is dragging the system down. Sensing a
lack of confidence, German Chancellor Gerhard Schroeder resigns. European equity markets badly lag the US and Japan.
5. Government legislative relief on the double taxation of dividends encourages some technology companies to start making
quarterly payouts to shareholders from their huge cash hoards. Cisco, Dell, Oracle, and Microsoft lead the way.
6. The housing bubble doesn’t burst; it grows larger. Home prices rise in the Rust Belt while remaining elevated on the two
coasts. Alan Greenspan resigns as Federal Reserve Chairman, saying he isn’t up to handling yet another bubble. Lennar
and Centex are strong performers.
7. With a massive US military force at his borders and United Nations inspectors increasing the pressure, Saddam Hussein
decides to step down and seek asylum in Libya rather than watch the slaughter of thousands of his people. North Korea’s
Kim Jong Il negotiates with US and United Nations representatives and agrees to stop converting spent uranium fuel rods
into weapons-grade plutonium. We get through the year without a major military battle in the Middle East or Asia,
increasing investor confidence and reducing the risk premium for equities. Oil remains in tight supply, however, and
hovers at $30 a barrel. Oil service stocks Schlumberger, Halliburton, and BJ Services break out and deliver strong
performance.
8. After a difficult period, a number of significant biotechnology products receive Food and Drug Administration approval.
This group, which had weak performance in 2002, comes alive. Amgen and Gilead perform especially well.
9. Just as Pakistan with all of its terrorist problems was the most rewarding emerging market of 2002, Brazil leads Latin
America, the almost-forgotten continent, to a stock market recovery. Tighter fiscal control, higher agricultural commodity
prices, and the US recovery fuel the turnaround.
10. Expressing her concern about the lack of vitality, spirit, and programmatic vision in the Democratic Party, Hillary Clinton
announces she will run for president in 2004, at least four years ahead of schedule. George W. Bush is said to be looking
forward to the campaign so that a Bush can finally have a victory over a Clinton.
U.S. Investment Strategy – January 6, 2003
Byron.Wien@morganstanley.com
Byron R. Wien
January 2003
January 3, 2003 closing prices for stocks mentioned: Cisco (CSCO $14), Dell (DELL $28), Oracle (ORCL $12), Microsoft (MSFT $54), Lennar (LEN $53),
Centex (CTX $51), Schlumberger (SLB $43), Halliburton (HAL $19), BJ Services (BJS $33), Amgen (AMGN $49), Gilead (GILD $36).
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