Subject: [NEXTEL-1] WSJ.com - What Might Blindside The Market in 2003.html

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Date: Mon, 23 Dec 2002 10:45:55 -0500

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What Might Blindside

The Market in 2003

By GREGORY ZUCKERMAN

Staff Reporter of THE WALL STREET
JOURNAL

Next year will be a good one for both stocks and the economy, though
nothing special. Bonds won't have another banner year. Tech and telecom
stocks won't shake their troubles, and rising oil prices will hamper the
economy.

Those are some of the consensus views for 2003 from Wall Street's best
analysts and economists.

Funny how these types of predictions for the stock market often don't
work out, though. Last year, for example, the "smart money" was predicting
a sharp turnaround for stocks. But 2002 has been even worse than 2001. In
fact, past troubles for the market, from the Asian crisis in 1997 and
Russian debt default in 1998 to the stock market's plunge in the spring of
2000, have shocked many market pros.

Now, even with predictions of slow, steady economic growth next year,
stocks have been treading water lately, trying to protect the healthy gains
achieved since October. Last week the Dow Jones Industrial Average inched
0.9% higher, leaving it up nearly 17% from its Oct. 9 low and down 15% for
the year to date.

The tech-heavy Nasdaq Composite Index was nearly flat last week, rising
0.1%. It is now more than 22% higher than its October low and down 30% for
the year.

So as investors scrutinize their investments for the new year, they may
want to take into account events and trends that could blindside the market
in 2003.

Here are a few potential surprises:

Tech and Telecom Surge

What was the easiest way to make a small fortune in these troubled
sectors in the past couple of years? Start with a large fortune.
Badda-boom. But even though technology and telecommunications stocks have
been tumbling for almost three years, there actually is reason to think
that maybe -- just maybe -- some of them will stage strong rebounds in
2003.

For one thing, most start at very low levels. Sun Microsystems, for
example, trades at about $3, down 75% in the past year. With any meaningful
rise in new orders, the stock could surge, giving a jolt to many investment
portfolios. Some stocks, such as Nextel
, already have soared since October
as investors bet that the worst is over for the company.

More important, corporate spending has been so limp in the past two
years that tech and telecom companies could benefit from a surge in new
orders if the mood in corporate boardrooms improves.

Joseph McAlinden, chief investment officer at Morgan Stanley Investment
Management, argues that many companies need to upgrade much of the
infrastructure they purchased in the late 1990s, and he urges investors to
buy up these stocks now. "Between now and the end of 2004 there will be a
significant recovery" for these beaten-down sectors, he predicts. "The move
off the October lows [for these stocks] will continue."

Oil Prices Collapse

Oil prices have been heading higher in recent months, as anyone buying
gas or heating oil will attest. Much of the reason for the rise is the
looming possibility of a U.S. conflict with Iraq, leading to fears that a
war will impact the supply of oil around the globe. But some say oil prices
could tumble if a war with Iraq ends quickly.

In fact, Jim Paulsen, chief investment officer at Wells Capital
Management, argues that a short war in Iraq will send oil prices plunging
to as low as $18 a barrel from the current level of around $30.

If that happens it would be a boon for consumers and companies alike,
helping the economy and stock market. And even bonds would get a boost
because lower oil prices would keep a lid on inflation.

"Lower oil prices would really juice the consumer sector," Mr. Paulsen
says.

Interest Rates Soar

The best bet during the past five years has been on bonds, not stocks.
As interest rates have plunged, bond prices have soared. The gains are
expected to continue in 2003, as the economy stays in check and the Federal
Reserve keeps rates low to fight off deflation, or falling prices.

But what if the economy's turnaround is more robust than expected, and a
hint of inflation is felt in the air? If that happens, interest rates would
jump. In fact, rates remain so low right now -- near 40-year lows, to be
exact -- that it wouldn't take much inflation to spook investors. If rates
do rise, bond prices, which move in the opposite direction of yields, would
plunge, hurting all the investors who shifted into these investments in the
past year in search of safety.

Japan Stages a Comeback

Sure, this one seems pretty far-fetched. Japan's economy seems to be
getting worse, not better, and predictions are for zero growth in 2003.
Investors betting on a turnaround have been burned time and time again in
recent years.

But some experts see signs that Japan's leaders may finally realize the
extent of the country's problems and predict that tough decisions will be
made to turn things around. If any signs of improvement emerge for the
world's second-biggest economy, it could send stock prices in various Asian
markets soaring and in turn boost global growth.

"People have grown tired and weary of waiting for Japan, but if they
finally take some serious actions to get their economy growing again" there
will be gains for investors, says Martin Barnes, managing editor of the
Bank Credit Analyst.

Iraqi War Is Drawn Out

The consensus view among market watchers is that a U.S. war with Iraq is
likely to be quick and successful. But it's worth considering what would
happen if the U.S. gets bogged down in the Persian Gulf, perhaps as Saddam
Hussein ravages his own country, sparking a world outcry that hamstrings
efforts to change the Iraqi leadership.

If that scenario materializes, it would hurt stocks and bonds. The
reason: Consumer and corporate spending likely would suffer, as the nation
becomes distracted by the war, hurting profits. And a longer war than
expected could send the U.S. budget deficit even higher, possibly crippling
U.S. bonds.

"Iraq could be the biggest fly in the ointment" for the market, says Mr.
McAlinden of Morgan Stanley.

A Peaceful Year

After a string of years featuring outright tragedy, tumbling financial
markets and shocking corporate corruption, some say the biggest surprise of
the year would be relative calm and stability, enabling the economy to
heal.

"Just to get through one year without any big surprises would allow the
economy to get back to normal," says Mr. Barnes.

Write to Gregory Zuckerman at
[email-masked]

Updated December 22, 2002

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