Published January 2002

Market 2002: Bit
of optimism, pinch
of uncertainty

By Kimberly Hilden
Herald Business Journal Assistant Editor

The past year was a wild, unpleasant ride for investors.

Wall Street began 2001 on a sour note, with the Dow Jones industrial average dropping almost 141 points to close at 10,646.15 on Jan.2. Standard & Poor’s 500-stock index fell 37 points to end at 1,283.27, and the Nasdaq plummeted 178.66 points to close at 2,291.86.

One news report dubbed it “Wall Street’s worst New Year’s start in a generation.”

Fast forward 11 months or so, and the market wasn’t any prettier, with the Dow (at press time) closing just above 10,000, the S&P down near the 1,100 mark and the Nasdaq falling below 2,000.

As for the new year, well, that’s up for speculation. As a leading economic indicator, the market could encounter an upswing if what economists are predicting comes true.

US Bank economist John Mitchell recently told members of the Everett Area Chamber of Commerce that the Puget Sound economy should begin to recover from the recession this year, thanks in part to interest-rate cuts, federal government tax cuts and the need by businesses to fill long-depleted inventories.

And Mary C. Farrell, a Senior Investment Strategist for UBS PaineWebber, said in November that during the next 12 months the U.S. economy should show “marked signs of recovery.”

But recent U.S. economic indicators, such as unemployment, which rose from 5.4 percent in October to 5.7 percent in November, and corporate profits, which decreased 8.3 percent in the third quarter, have had a dampening effect on the market, too.

“Going forward, I don’t think there’s anything for sure,” said Michael Dutton, Senior Vice President and Branch Manager at Ragen MacKenzie’s Everett office.

Even with this uncertainty, investor optimism is swinging back since it hit record lows in September, according to the Index of Investor Optimism, a joint effort of UBS PaineWebber Inc. and the Gallup Organization that polls a sampling of investors randomly selected from across the country.

The index, which had a baseline of 100 when it was established in 1996, began the year at 130 points but started to decline in April, when it was 116. By August, the index was at 86, and then it plunged to 63 in September, when 53 percent of those polled were interviewed following the Sept. 11 terrorist attacks.

In October, however, the index rebounded to 130. It dipped slightly, to 117, in November.

“We’re telling (clients) it looks like we’re going two steps forward and one back instead of two back and one forward,” said Bob Leach, Senior Vice President and Regional Manager at Ragen MacKenzie. “So there is a little bit of optimism out there.”

Dutton said he has seen an increase in investor interest of late, with more people talking about putting money into the market than a year ago.

“But I think what we’re going to see going forward is people that are true investors getting into the market, unlike in '98 and early '99, when people who were not investors, who were speculators, were calling in just because everything was on fire,” he said. “Those aren’t true investors for the long term.”

“One of the things that we’re encouraging people to do is not wait too long to get back into the market, ... even though we may see some of this bouncing,” Leach said.

“They don’t’ have to jump in head over heels,” Dutton added, “but they can get in piecemeal, get their confidence back.”

“And buy good stock,” Leach said — stocks with earnings, companies with a revenue stream that will grow and a business plan that looks encouraging.

For investors who decided to ride the roller coaster market of 2001, it wasn’t all doom and gloom, area brokers said.

Larry Knudsen, a partner and adviser for Moss Adams affiliate Financial Security Group LLC, said his company’s focus on client education and expectation development along with its use of optimization and asset-allocation models have “created an outcome in which we have fared the market volatility quite well.”

“A key of successful portfolio management is optimizing the portfolio through rebalancing through good years as well as bad,” Knudsen said.

While there are industries that tend to perform stronger in economic downward cycles, you don’t want to put all your eggs in one basket, he said. Instead, blend those holdings with holdings that are expected to do well in the next cycle.

Diversification has been key to weathering the stock-market storm, Dutton said.

“I think it differs, obviously, client by client. We use an asset-allocation model for the most part, especially with retired people, and so the ones who have been very diversified haven’t gotten hit as much as the headlines in the papers might suggest they have,” he said.

“For the most part, I think, our clients have been understanding that it’s not their issue; it’s a national issue, and that hopefully, the economy, the strength of it — the Fed’s cut the interest rate (11) times now this year — hopefully, some of that gets the market going.”

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