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Merrill Predicts Economy Back in Black for 2004


NEW YORK - The trek to the top isn't over quite yet, but the rate in which the economy climbs to the summit will slow in 2004, according to Robert Doll, Merrill Lynch Investment Managers' president and chief investment officer.

While presenting the firm's 10 predictions for 2004, Doll said last Tuesday that despite optimism that the economy can build on progress made in 2003, he doesn't see the ability to duplicate last year's success and growth.

"It was a year in which people took their foot off the risk break," he said of 2003, noting that it is very typical for investors to do so during the beginning of a bull market. This year should produce some stellar results, he said, with stocks on track to outperform both cash and bonds. However, they will not measure up to last year.

"Equity markets had their best year in 2003, but can continue to have good ones," he said.

For the record, Merrill was 60% correct at reading tea leaves for 2003, as six of the 10 predictions came to pass in the year, Doll said. As for this year's forecasts, Doll said he anticipates U.S. real growth to reach 4% for the first time in five years and that the American consumer will pass the growth baton to the rest of the U.S. and the world economy.

Carrying the World'

"The U.S. economy has carried the world on its back the last few years," he said. "The U.S. consumer will not lead the way in 2004 as it had in the past three years. We think the pronunciation about the death of the U.S. consumer is greatly exaggerated. They have at least six more months of life left."

Furthermore, earnings growth, headed by growth in revenue, will exceed expectations. From 2002 to 2003, reported earnings jumped 57.4%, the largest leap in the post-WWII era, Doll said. Additionally, operating earnings were 16.9% in 2003, tops since 1999. Year-over-year earnings growth will slow to 12% to 15% in 2004, Doll predicts, but will continue to exceed expectations.

Doll also anticipates the Federal Reserve will raise its rates, yet remain accommodative, moving the Fed funds rate to 2% by year's end. The combination of strong economic growth, some pricing power and the declining dollar will push the yield on 10-year Treasury notes above 5%, Doll also forecasts.

Doll anticipates a shift to higher-quality, higher-priced stocks and away from low-quality, low-price, high-beta companies, which led the way in 2003. In addition to a continuing rise in commodities, Doll expects the Republican Party to maintain the White House as well as gain seats in both houses of Congress.

Lastly, Doll said he expects a cyclical bull market peak late in the year, or early in 2005, due to high debt levels, high absolute valuations, rising rates and other structural imbalances.

However, as with any prediction, there are always unknowns, including fund legislation. "If we observe all the nonsense in the mutual fund industry since Labor Day, the markets still went straight up," he noted. However, Doll said he expects the Senate to take up a bill similar to the Baker Bill that overwhelmingly passed in the House (see related story, page 12). The great unknown is if legislation becomes even more onerous than the Baker bill. For that, we will just have to wait and see.

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