By Richard L. Kesner, President
The CommonWealth Group
"The farther backward you can look, the farther forward you are likely to see"
Winston Churchill
The third quarter was the worst quarter for the stock market since the fourth quarter of 1987, a period which included the October 1987 crash. The S&P 500's 11% drop in September 2002 was one of the largest 30-day declines on record, and the index's 28% year-to-date decline now surpasses 1974 as the worst year for stocks in the past 50. The current bear market has the distinction of being the worst period for stocks since the 1929 crash.
The S&P ended September down over 46% from its closing high in March 2000. The NASDAQ composite is down over 76% for the same period. The trailing P/E ratio for the S&P 500 was 18.3 at the close of the quarter, a bit above the historical average, but very reasonable given the current interest rate environment.
Chief among investors' worries is the uneven pattern of the economic recovery. Third quarter GNP growth was relatively strong, buoyed by home building and auto sales, thanks to low (and in the case of autos, nonexistent) interest rates. Manufacturing and business spending has continued to be soft, with leading indicators declining in August for the third consecutive month.
The valuation and optimism bubbles have been deflated. The Federal Reserve's model stock valuations vs. interest rates indicate that the stock market is 20% undervalued. While a 20% gain appears unlikely, the long-term values are there. The key is investor confidence that has been battered by the decline in wealth, war worries, accounting issues and corporate malfeasance. We believe that investor confidence will gradually be restored, but the fear factor may be at or near a peak, meaning the market is at or near a bottom.
Nonetheless, for the first time in months we are optimistic that the U.S. economy is not sliding back into a recession and that the economy will grow for the balance of 2002 and throughout 2003. Economic growth will be the beginning of rising corporate earnings, but at reasonable rates. This should cause the stock market to have an upward trend in 2003. We believe that this is the to invest more into equities and move assets away from cash and other fixed income investments.
BACK TO TOP
HOME l CONTACT US
|
