text: Is the bull back?
  
  NEW YORK - Healthy economic growth and gradually falling unemployment in 2004 will help sustain a rally that has the stock market on pace to post its first winning year since 1999, T. Rowe Price Associates Inc.'s chief economist said yesterday.
  
  Alan D. Levenson predicted that unemployment will dip to 5.5 percent next year and that the gross domestic product will climb by a solid 4.25 percent amid accelerating demand for goods, putting pressure on the Federal Reserve to notch interest rates up.
  
  Levenson and a panel of T. Rowe Price fund managers spoke at the company's annual economic outlook briefing at the Princeton Club in Midtown Manhattan.
  
  "In this context, the Fed is going to have to take its foot off the accelerator," Levenson said.
  
  Historically, the Fed has avoided raising rates in an election year to avoid the appearance of trying to influence the outcome. But the growing threat of inflation - fueled by rising demand and shrunken inventories - will test that supposition next year, Levenson said. He expects the Fed to gradually impose moderate rate increases.
  
  "I think conditions are going to be [more right] than ever to raise rates in an election year," he said.
  
  Yesterday's briefing followed a bevy of positive economic news that lifted stocks Monday, sending key market indexes to their highest point in 18 months or more. Investors pulled back moderately yesterday.
  
  Manufacturing activity registered a 20-year high last month, its fifth consecutive monthly advance, and construction spending had its best month ever in October. Analysts latched on to the news as further evidence that the economic recovery is sustainable.
  
  That is expected to be good news for those seeking jobs. Levenson said growth in worker productivity is reaching a peak, which means employers are going to have to hire to keep pace with rising demand for goods.
  
  That will further spur consumer spending, he said.
  
  The recovery will extend beyond U.S. borders, said Robert W. Smith, president and chairman of Price's Growth Stock Fund. After a prolonged period of disappointing results, Europe is showing signs of a rebound. Smith also is bullish on Japan and China, two hot sectors for fund managers in the past year.
  
  "China has been an area of explosive growth. ... It's becoming big and it's going to become bigger," he said.
  
  Smith said the current market acceleration bears some similarities to the market bubble of 1999, which was fueled by speculative investing in technology and other high-risk investments. He called on fund managers and the news media to do a better job of educating investors about buying high-quality stocks for the long term.
  
  "It's still a market of traders and not investors," he said.
  
  Small-cap stocks, which are outperforming large-cap stocks by a near-record margin this year, will continue to beat large-cap stocks well into next year before slowing down, said John H. Laporte, portfolio manager for the company's New Horizons Fund.
  
  Micro-caps - often money-losing companies with stock priced at less than $5 per share - have led the way this year with eye-popping gains. The shift next year will be toward higher quality investments, Laporte said.
  
  Yesterday's briefing took place as many fund companies are trying to keep a low profile in light of the growing investigations by New York state Attorney General Eliot Spitzer and federal regulators into mutual fund trading abuses.
  
  Price officials said that they have always had policies against so-called late trading and market-timing, which are the focus of the investigations.
  
  The company added that it has cooperated with requests for information about its policies from investigators, as have dozens of other firms. An internal investigation found no signs that Price managers have engaged in unethical trading practices, said Steve Norwitz, a spokesman for the company.
  
  The company has suggested that it might pick up business as investors shift their money to fund companies untarnished by the scandals. "We're not aware, at least, that T. Rowe Price is the subject of any investigation," Norwitz said.
  
  In response to a reporter's question, Laporte, the portfolio manager, said he is open to the idea of requiring fund executives to disclose their investments and salaries as a way of making the industry more transparent to shareholders.