by Archie M. Richards, Jr., CFP^®
January 5, 2004

At the end of 2002, I predicted that the Dow Jones Industrials would hit 11,000 by the end of 2003.

It didn't quite make it. The Dow rose to 10,454, up 25 percent for the year, not including dividends, which are currently running at 2 percent on Dow stocks. The Nasdaq Composite rose a stupendous 50 percent during 2003. Foreign stocks outpaced U.S. stocks, as I've been predicting.

2004 looks pretty good, too, up something like 17.5 percent. Call it Dow 12,300 by yearend. (Assigning a number is just a lark. It's hard enough to be consistently right about the market's direction, never mind the amount.)

Here's why I remain bullish:

• Sentiment is still bearish. When investors are pessimistic, prices are likely to rise.

• During the 4th year of the president cycle (election year), the stock market usually rises modestly. Appreciation of 17.5 percent is hardly modest, but in general, the entire decade should be favorable.

• National politics show promise for the future. But first, the dangers:

The liabilities of the huge Federal National Mortgage Association (Fannie Mae) are 54 times the company's net equity. If the value of its assets fall by less than 2 percent, the equity would be wiped out, weakening the nation's banking system. The company hedges the risk with derivatives. We can just hope it hedges correctly. The Fanny Mae problem was created by government. I expect it to be solved by government, but it's worrysome nevertheless.

Before long, Saudi Arabia will probably have an explosive revolution. This would be a good thing in the long term, but it would lower stock prices for a time.

President Bush's "compassionate conservatism" is an abomination. Government cannot be compassionate. It's heavy-handed and restrictive. It suppresses individual initiative. It looks after its own interests first, especially its enlargement.

Government's apparent benefits are obvious, as when someone receives a check. But most government harm is hidden. No one can know, for example, what good might have been done with money held by an individual that the government took away in taxes. Of all forms of human organization, freedom and free markets are the most compassionate. Far too many Americans, having been educated by government, are ignorant of this.

As a share of the economy, federal spending has climbed from 18.4 percent to 20 percent in the past two years. Between 2002 and 2004, for example, education spending grew by 31 percent, housing & urban development by 19.1 percent, and agriculture and the EPA by 13.5 percent. Talk about obesity, non-military federal expenditures are disgustingly high.

Regulations are also growing too fast. Even in 2002, the number of pages in the Federal Register (a daily record of federal regulatory activities) was 76,000. This is up from the low of 45,000 pages during the Reagan Administration and even more voluminous than the 73,000 high during the Carter Administration.

There are other problems: The Sarbanes-Oxley Bill increases business costs and reduces the willingness of executives to take risk. Except for Health Savings Accounts, the Medicare Bill was a horror. Congress and the Supreme Court have sabotaged free political speech. To most members of Congress, only their reelection counts, good government be damned.

But not all is lost. The disastrous steel tariffs were reversed. The tax cuts worked. The war against terrorism is proceeding marvelously. (Most wars end messily. World War II's quiet aftermath was unusual.) Social Security will be partly privatized, and those dreadful tort lawsuit penalties will be suppressed.

The American people are far ahead of the government in their skepticism about government's long-term benefits. A good indication is the popularity of conservative radio talk show hosts. As Paul Jacob, Senior Fellow of U.S. Term Limits puts it, "90 percent of the pork barrel projects that [Congress passes] without public debate would go down in flaming defeat if voters could decide each one up or down."

Freedom is growing all over the world. The ponderous American government will follow suit. Before many years, I expect the members of Congress to become subject to term limits. Political changes will then be monumentally favorable. Remember, stock prices move in anticipation.