Stocks
We still see stocks doing well in 2005, despite their sluggish first-quarter showing due to high oil prices and inflation fears. Although acceleration may be months away ...
Expect the S&P 500 to return about 12% for the year, combining a 10% increase in share prices with an average dividend of 2%.

Inflation concerns will ease by fall. If anything, the Federal Reserve’s statement about the rise of inflation is a reminder that the Fed is pledged to keep it in check. More interest rate hikes are almost a sure bet.
And energy prices will return to earth, falling to $45 or so a barrel by late summer.

Look for inflation to clock in at about 2.5% for the year.
That will allow stocks to track earnings, which will grow 10% this year ... a solid performance although well below last year’s pace.
Stocks will also get a lift as other investment choices sputter. As interest rates rise, bond prices will have nowhere to go but down. Soaring real estate prices are scaring off investors. And with Citigroup and Verizon paying 4%-5% dividends, one-year CDs don’t hold much appeal.

Large growth stocks are a good choice. Their returns lagged as smaller firms surged during the past few years. Now they’re cash-rich and plan to take advantage of that to buy back shares or raise dividends.
Many of the 30 stocks in the Dow Jones industrials fit the bill: Disney, Microsoft, IBM, Honeywell, GE, ExxonMobil, and Johnson & Johnson.
But be wary of industries hurt by higher energy costs and rates. These include airlines, automakers, utilities and some financial firms.
Many mutual funds specializing in big firms are worth a look. They save investors from picking stocks. We like Marsico Growth, T. Rowe Price Growth Stock, and Fidelity Capital Appreciation.

Owning foreign stocks ... say 15% to 25% of equities ... makes sense. That will balance out U.S. risks and capitalize on solid growth abroad. Well-run mutual funds investing overseas are Oakmark International, Julius Baer International Equity A, and Dodge & Cox International.
Limit bonds to those with short and intermediate maturities. An easy way is to buy into the Harbor Bond Fund. For tax-free muni funds, which are also attractive, try Fidelity Spartan Intermediate Municipal.
And hold just 5% or so in real estate investment trusts (REITs), such as Vanguard’s REIT Index or T. Rowe Price Real Estate. Even better, look at Third Avenue Real Estate Value, which puts a third of its assets into REITs, with much of the rest going into real estate company stocks.

Regs
Bush is launching a renewed assault on business regulations that firms find burdensome, redundant, unnecessary, or misguided. Most changes can be made administratively without Congress’ consent.
Among the likely changes to take effect within two years:
Development of coastal areas will be much faster and easier as requirements for environmental impact assessments are cut back.
It will be simpler to import auto parts from Canada and Mexico.
Employers won’t have to provide as much demographic information on workers in annual reports to the Equal Employment Opportunity Comm.
Hazardous waste reporting should be easier as more substances are freed from such requirements by the Environmental Protection Agency.

Business costs
Firms that ship by truck face higher costs and big bottlenecks during the peak season of July-Oct. Capacity just hasn’t grown over the past five years as demand has surged. Signing contracts now may help limit disruptions and slow price hikes, which will average 15%. Go with bigger carriers because they have a lot more flexibility.
Worst hit: Small companies in automotive parts, retail supply, construction, steel, fabrication, metals, lumber, agriculture, and paper supplies.
Moving goods in and out of Calif. will be hard because of the vast number of imports arriving. Expect problems also in Wash., Ore., Ariz., Texas, and many of the big midwestern hubs, such as Chicago, Cleveland, and Kansas City, Mo. Many Eastern Seaboard hubs will also be hurt because of the need to deal with rising imports.

A new data tool can help control restocking costs for companies in the retail supply chain ... stores, wholesalers, warehouses, etc.
The Global Data Synchronization Network keeps track of thousands of product specs that change frequently. For example, it can warn markets that a cereal box has a new size that could pose a shelving dilemma.

Many airfares are climbing. The major carriers are desperate for money to help defray the soaring cost of fuel. The only exceptions will be on routes where the airlines compete with low-cost carriers. Even with the rise, tickets nationwide are still 20% below 2000 levels.

© 2005 The Kiplinger Washington Editors, Inc.