Mad Dow Disease

Since December 31, 1999, the Dow has declined 7%. For many years, the only technology stock in the Dow was IBM. But, due to the great returns of technology stocks, there was great pressure to add more technology stocks to Dow so it would be more competitive with the S&P 500 index. So, Microsoft and Intel were added. Since then, they have proceeded to drop 40% and 60%, respectively from their highs, causing the Dow to drop further than it would have without them. While we agree that the Dow should have had more technology representation, it is interesting to note that even the “keepers” of market indexes were caught up in the hype.

Once again, the more things change, the more they stay the same. Over ten years ago, our country was obsessed with the growing budget deficit and the banking crisis. The media was busy whipping up the public into a fearful frenzy. It was the end of the financial world and everybody knew it. At the top of the best-seller list was Ravi Batra’s book The Great Depression of 1990. What followed, however, was a great decade of prosperity and economic strength.

During the last few years of the 1990s, the U.S. economy was very strong and wealth creation seemed so easy. Dow 36,000 and The Roaring 2000’s hit the bookshelves and sold like crazy. Again, the general public was all worked up—but this time with greed. You couldn’t attend a social event or turn on the TV without being aware of how quick and easy money was being made in the stock market. Again, what has transpired in the past year was the opposite of what was expected by most investors. While the bull market may be dead and gone, the market in “bull” is still booming. Over the past 10 years, investors would have missed out or lost substantial wealth by following the crowds. In investing, the hype is always wrong.

Going forward, the erosion of stock market wealth will clearly affect spending in the months ahead, perhaps enough to cause a recession. Over the next few months, there will be more bleak earnings news so the stock market is not out of the woods yet. However, the Fed’s rate cutting has reaffirmed its determination to stabilize the economy and has likely put a floor under stock prices. Just as prices started falling last year before earnings dropped, they will begin to rise again before earnings improve. In the past nine bull/bear cycles, the S&P 500 rose 32% on average before earnings began to improve. However, we believe a more modest gain is likely this time.

While it would be great to know exactly which way the market was going to move next, it really doesn’t matter because it is possible to earn a good return on one’s money in most market cycles. Many advisors have failed their clients by having too much money in the wrong sectors of the market at the worst possible time. While these advisors will take credit for the money made during a rising market, they blame it on the market during tough times. As an investor, you need to question your advisor’s advice over the past year. First, did your advisor proactively adjust your portfolio to the changing conditions during 2000. Second, if you’re an aggressive investor you should be down no more than 15% and if you believe your account is conservative, you should actually be up a little. If you did worse than these, it is not the market’s that failed you, but your advisor. Only during tough times does skill, or lack thereof, make itself evident.

Whether you desire to grow your wealth conservatively or aggressively, our success comes from professionally managing your investment portfolio and working to align your financial decisions with your goals. Our goal is to grow what you have and protect what you’ve earned.

Published in Westlake Magazine – June 2001

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