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2004: Off to a Great Start

Wow, what a year investors had. The misery of 12 months ago turned into bliss as the stock market flew. The roaring economy lifted every market index. Standard & Poor's 500-stock average, up 22 percent. S&P's 600 smaller stocks, up 34 percent. The EAFE index (Europe, Asia, Far East) of international stocks, up 46 percent. Emerging markets up 66 percent. High-yield bonds up 29 percent. Even intermediate Treasuries paid a positive 2 percent total return (after cushioning your stock losses with gains of 9 percent in 2002, 8 percent in 2001 and 10 percent in 2000). Finally, it's safe to look at 401(k) statements again.

Classically, a bull market's first leg up produces the highest percentage gains. That's the leg that market timers often miss. Their money remains in hiding because they don't think it's safe to buy back in. But those of you who invested steadily in 401(k)s might now have recovered most of the money you lost in the bear.

After some backsliding (a "correction"), bull markets have a second and maybe a third leg up, with lower percentage gains. Stocks should rise as long as investors expect future business profits to grow.

Much as I mistrust forecasts, I can't help saying that business looks great. Every sector is expanding at a rapid rate. The leading indicators for jobs have also turned smartly up, says the Economic Cycle Research Institute, meaning that "overall job growth is about to increase notably," despite its softness now. Our recovery is pulling the world along, with Asia booming, Japan improving and Europe edging up.

What's more, contrary to conventional thinking, consumers aren't drowning in debt. Total personal debt does stand at a record high. For the first time, consumer installment debt actually rose during a recession. But that doesn't mean that the very same people keep going deeper into hock. Credit is now available to larger numbers of borrowers, which can raise the total without breaking anyone's back. Record homeownership is a factor, too. More people carry mortgages -- mostly at low, fixed rates and therefore immune to future interest-rate hikes.

Debt has actually gotten a bit easier to carry. Over the past two years, financial obligations (debt service, auto leases, homeowner's insurance, property taxes and rent) dropped a bit, relative to income. Debt delinquencies are down. All told, voters should feel just dandy on Nov. 2.

The federal joystick steered us into this happy state, with tax cuts, low interest rates and massive deficit spending. All that loose money makes some pundits worry that inflation will soon rise. But core inflation (excluding volatile food and energy prices) fell in November, so disinflation remains in place. ECRI sees no problem over the next nine months, at least...