Money Matters

by Robert Hernandez




3rd Quarter 2002 - Economic Outlook



The first three quarters of 2002 continues to challenge most investors.  Investment returns in equities have deteriorated since January 2002, and most investors continue to realize negative returns on their equities.   There continue to be signs that the economy is improving, but the indicators are conflicting and the recovery appears to be slower than the media and economists predicted earlier this year.  The summer rally came in early July boosting the DOW from approximately 7,700 to 9,100.  An impressive bear market rally.  However, by late August the DOW quickly slipped back to around the 8200 to 8400 range.  Although a day traders dream, this excessive volatility is a headache for the long term and average investor.

But it is only natural that after such an extensive bull market as we recently enjoyed (spanning over 20 years!), for the market to require a rest to allow valuations to return to the norm (a P/E of 17 on average).  Currently, the components of S&P 500 have an average P/E of 34 and trade at 4 times book value.  Even after a 2 1/2 year bear market, many equities still exhibit excessive valuations.  Many companies have no P/E ratios because they are currently unprofitable.  Please remember that just because a stock sells at a 60% discount from its highs of 3/2000, does not mean that it is trading at a discount.  Earnings and profits dictate valuation, not price, and corporate earnings/profits continue at an anemic pace, for most equities.  Lately, even the retail sector has begun to show signs of weakness. The U.S dollar is currently (as of 9/3/02) at a 6 week low against other major currencies.  

Notwithstanding, a market bottom is all but impossible to predict, and the stock market leads an economic recovery by approximately 6 months.  As a result, it is important to maintain the appropriate asset allocation for your age and your objectives.  Being 100% in tech, growth stocks, value stocks, bonds, real estate, or even cash is usually not the appropriate strategy for most individuals.  Being 100% invested in any 1 sector or asset class will usually increase your overall risk.  Indeed, the only way to control risk or dampen volatility is through an adequately diversified portfolio.

On the positive side, mortgage rates are currently at a 40 yr low, and the real estate market has weathered the aftereffects of 911 relatively well.  This resilience is quite impressive and hopefully these low mortgage rates will help sustain the real estate market in the northeast and throughout the United States.  

In general, all rates are at extremely low levels throughout the entire yield spectrum.  With money market rates at around 1%, and the 10 year treasury bond currently yielding around 4 %, these are difficult times for the income dependent individual.

As 911 approaches, along with all the sad memories, let's be thankful for 2 of the greatest blessings that all of us Americans share, the freedom to choose, and the gift of life.  

Until next time, your neighbor…

Robert Hernandez



DISCLOSURE:

The comments made by the author are meant to inform the Galaxy community on general economic and financial matters and issues, and to entertain.  In no way should these comments be construed as a specific recommendation or investment advice.  Any actions that you decide to take relative to the comments pertained in this authors article, will be at your peril.  This article is not intended to definitively answer any specific investment questions nor does it attempt to give every possible outcome to the issues discussed. Because investments depend on your specific needs, risk tolerance, and circumstances, and because your needs are subject to change on a regular basis, the author advises you to seek counsel from a licensed financial advisor on any financial/investment issues or questions that you may have.  Investments are not bank guaranteed, not FDIC insured, and may lose value.

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