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Jewish World Review March 28, 2001 / 4 Nissan 5761

Frank A. Jones

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Consumer Reports


Looking for the uphill curve in the markets

http://www.jewishworldreview.com -- RECENTLY we visited Sedona, Ariz., one of our favorite areas second only to the Maine coast. In three days I spent several hours riding a mountain bike up and down the hills and valleys of this beautiful red-rock country.

The first hill was a long slow uphill ride followed by a sudden steep downhill only to be followed by another relatively level grade. I had no idea what would come around the next bend.

As I rode up and down these hills, watching the massive red-rock formations on all sides, I couldn't help but think of the gyrations in the stock markets over the recent past.

The market went slowly up in January, followed by a real steep downhill ride in February. It seemed to level out and started up in early March, but soon began another downhill ride.

The sudden decline in the S&P 500 - 9.1 percent in February - exceeded the decline in this popular average for all of last year.

Such a sharp decline in this broad index is very unusual. It has declined more than 7 percent in only three months of the past 12 years.

Like my bike ride, we don't know what's around the next bend, although I hope it will be a steep uphill climb (unlike what I hope for on my bike rides).

The popular optimistic view on Wall Street is that the February retreat is only temporary. The optimists believe that only the year's first half will be bad, and a wonderful second half will follow.

The Fed is easing interest rates and pumping money into the system, energy prices will stabilize or fall, an early tax cut is assured and the excess inventories will soon be liquidated. This will be followed by a Nasdaq rally that will restore consumer confidence and stimulate spending.

There are of course the usual pessimists who say January was a sucker rally. These pessimists are always looking for another extended bear market like 1973-1974, suggesting selling all stocks and buying nothing but government bonds.

Many market strategists and economic forecasters are somewhere in-between. Morgan Stanley's strategists are suggesting we are in a mild recession that could extend past the second quarter.

They are suggesting more declines in corporate profits will keep stock prices from rising soon. However, none of them is suggesting bailing out of all equity positions.

My youngest partner, Lance Hollingsworth, reminded me the other day about the many technological advances that drove the markets to unrealistic levels. Ten years ago, did you own a cell phone, or a personal computer, or have Internet access? How many prescription drugs that you take were created in the last decade? Who had heard of gene therapy except in science fiction novels?

There are more technological innovations that will, at some point, drive markets again.

Last year, the Nasdaq hit a high of 5,132 and the S&P 500 went to a peak of 1,413. Investors, professional money managers, analysts, and all the "motley fools" were more worried about the risk of not making money than of losing it. Greed ruled the markets.

This is not the time for fear to dictate your investment strategy. Famed money manager Peter Lynch recently reminded us that in the last 100 years, we have had 56 periods in which the market has declined at least 10 percent. Of those 56 declines, 16 have been 20 percent or greater.

Stop worrying too much about the debate over a quick recovery or a more extended recession. Keep your sights on the long term and invest accordingly.

I recently overheard a mutual fund manager discussing the "bear" market with an investor. "We love this market," he said, "there are all kinds of bargains out there."

It may soon be time to get greedy and pick up some of these bargains. We won't go downhill forever and that long uphill climb is somewhere, maybe around the next curve.

Frank A. Jones, investment adviser and a former director of the Eighth District Federal Reserve Bank, writes about mutual funds at The Commercial Appeal in Memphis Comment by clicking here.

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