What lies ahead for 2003? This time of year, many mutual fund economists, chief investment officers and portfolio managers offer up their crystal-ball predictions on what the new year will bring.

Will the economy rebound or plunge into a double dip recession? Will the stock market keep chugging along like it has been in recent weeks, or fall off yet another cliff?

Like the previous two Decembers of this ongoing bear market, the experts see reasons for hope. Fund insiders are optimistic 2003 will bring a gradual recovery to the economy, coupled with continued growth in the Gross Domestic Product (GDP).

And a number of fund managers are now calling Oct. 9 the market bottom.

Right on the Money

Fund folk also believe the stock market will be the place to be, although some sectors of the bond market could prove profitable.

"Our overview is that we are in a conventional recovery following a conventional recession," said Tom Madden, vice chairman of investment management at Federated Investors of Pittsburgh. But for the economy to really be out of the woods, the manufacturing sector, which comprises one-fifth of the economy, has to reverse its continued contraction and begin to grow. Overall, once companies begin hiring again, then capital spending will pick up, he said. "Until we see a resolution of the Iraq situation, it is awfully easy for companies to put the lever into neutral on [spending]," he added.

The good news is that despite all of the troubles of this economy, productivity is continuing to grow at about 5% year over year, which translates, macroeconomically speaking, into higher profits, Madden said.

But the bad news is that companies have had a "ferocious focus" on cutting costs as the driver to growth, however small those figures might be.

Additionally, the uncertainty about war is serving as a damper, according to many money managers.

Most investment professionals are predicting a modest growth in the GDP, ranging from conservative estimates of 1-1/2% to as high as 4% per quarter next year.

"While a 3% growth rate coming out of a recession is historically low, it is what we expected coming out of a shallow recession," said Steve Irons, vice president with Wellington Management of Boston. Irons is manager of The Enterprise Deep Value Fund, one of The Enterprise Group of Funds of Atlanta. The third quarter of 2002 proved to be the fourth consecutive quarter of positive figures for the GDP, he said.

Rates, Republicans

Two macroeconomic factors bode well for the economy going into 2003, said Crit Thomas, director of growth equity investment at the Armada Funds of Cleveland, advised by National City Investment Management Co. The Federal Reserve's continued rate cuts have put a lot of liquidity into the market. In addition, now that Republicans have wrested control of Congress, additional tax relief measures for U.S. citizens will have a stronger chance for passage.

While the nation is now beginning to feel the economic recovery, corporate earnings have definitely not returned, Thomas noted. It's essentially a "profitless recovery," he said.

Consumers, on the other hand, have been steadfast in their continued spending, fueled in part by mortgage refinancings and automobile manufacturers offering 0% financing.

"But how many more houses or cars will consumers want?" Thomas asked, rhetorically.

Does inflation, or even deflation loom on the horizon next year?

Most investment managers said they aren't seeing the early signs of either. "We don't think you'll see deflation, disinflation or inflation, but just flation,'" quipped Don Ross, chief investment officer of National City, the Armada Funds' advisory firm.

Despite both inflation and interest rates being at 40-year lows, small changes may be in the near future. "Right now you have some powerful deflationary forces, but we are not forecasting deflation," said Scott Roney, senior vice president at PIMCO of Newport Beach, Calif. But four to five years out, annual inflation should creep back to 3% to 4%, he added.

As for the likelihood of additional interest rate cuts, few investment managers think further cuts are unlikely - though not impossible.

"Interest rates can't go to zero," said Greg Staples, senior managing director at MONY Capital Management of New York, and manager of the new Enterprise Short Duration Bond Fund, which debuted two weeks ago.

Most expect that the Fed will, albeit reluctantly, gradually begin raising interest rates within the next six to 12 months. Some are predicting that the Fed will wait for one or more of the equity indices to hit a higher milestone before taking action.

As for the stock market, many fund insiders expect 2003 to be a brighter year with the worst behind us. After an avalanche of bankruptcies, a slew of executive indictments, the decline in corporate earnings and the intense scrutiny of accounting practices, the only logical direction is up, said David Hyun, executive vice president of Fred Alger Management of New York.

"We have a lot of reason for optimism," he said.

But several managers are cautiously optimistic, even with the market uptick of the past two months.

Is This Bull For Real?

The question really becomes, is this a new bull market or is this a counter-trend rally in a secular, multi-stage bear market.

According to Federated's Madden, "The jury is still out." A graduated stage exit from a bear market can include some powerful rallies before the next downdraft, he added.

Investment managers agree that the impact of a war in Iraq is cause for concern but doesn't spell disaster for the equity market.

"It depends on how the war goes," said Ron Canakaris, president, CEO and chief investment officer at Montag & Caldwell of Atlanta, and manager of the Enterprise Growth Fund. A short, victorious war with Iraq will bode well for the stock market, most managers agree. But a longer or more difficult war could merely temper an early enthusiasm rally.

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