Have the forecasters got it right?

"The third time was a charm," says Michael Santoli in Barron's. Having taken a bullish stance in 2001 and 2002 based on hopes of economic and profits recovery in the second half of the year, the same bet finally paid off for forecasters in 2003 as Wall Street rebounded from a three-year losing streak. The S&P 500 and Dow Jones indices rose by 26% and 25% respectively and the Nasdaq index by 50%. And strategists expect to see "a little more in 2004". The majority expect an advance of 3-15% by the S&P as GDP and earnings growth, despite decelerating, continue to bolster stocks.

So will the consensus view defy the odds and be proved right for a second successive year? It's certainly "hard to see what might prevent the market from retaining its upside bias" in the short term. Investors "are happy to extrapolate improving economic data into a continuing upward arc", and chartists note that the technical outlook remains auspicious. Moreover, there is still scope for "fresh cash" to bolster the market from retail investors who have missed out on recent gains. Indeed, the recent uptick in stock-fund inflows shows that this process is already underway.

Stocks are also benefiting from a dearth of alternative, says the FT. Returns on cash are low, and bonds look unattractive, given the inflationary pressures resulting from loose monetary policy. But there are also plenty of "traps lying in wait" for American - and hence global - equities. Indeed, says Philip Coggan, also in the FT. Terrorism is a worry and the risk of a dollar collapse is a "potential calamity". Until now, Asian central banks have prevented the latter by buying hordes of US bonds. But with the vast US trade deficit still widening, they may "run out of patience" with the dwindling greenback. Long-term rates would then rise sharply, "applying the brake" to the economic expansion. Note, too, that US shares remain "very expensive" by any measure, largely because investors seem to be expecting last year's spectacular earnings growth to endure over the medium-term. But once they realise that this growth was cyclical, rather than structural, valuations will slide.

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Meanwhile, the massive fiscal and monetary stimulus of the past few years has created another bubble by driving US government and consumer debt to record levels, says Mark Rostenko in The Sovereign Strategist. While this is likely to endure until the November election, thus bolstering stocks, it hardly amounts to the "healthy economic base" required for a sustainable bull market. Indeed it does not, fund manager Hugh Hendry told Barron's. Given the structural imbalances in the economy, the best we can hope for is that stocks "go nowhere" until 2020. Alternatively, the whole edifice could come crashing down. If it does, expect the S&P to slide by up to 80% from its 2000 peak to around 300.