Marketing Commentary- Q3 2002

Posted by on Oct 1, 2002 in MFA Quarterly Commentaries

A (final?) surge in bond prices accompanied a record drop in the broader stock market over the past three months.  Most major stock indices now show negative returns over the past five years.  These returns (see below) are extremely beneath long-term trends, setting up another regression to the mean (this time to the upside).  Sentiment has collapsed with concern over the war in Iraq adding one more element to the Bear Market Perfect Storm string of events that have market the past two and a half years.

Trends to be Aware of

For the first time ever, a bond fund (Pimco Total Return) is the largest mutual fund.  The fund has attracted record inflows during a bull market in bonds, displaying once again that investors chase recent performance.

The Investors Intelligence poll, a telling reading of investor sentiment, simply asks its thousands of members, “do you feel bullish or bearish?”  Extreme bullish readings have often accompanied market tops, while bearish sentiment often marks market bottoms.  This makes sense.  Bearish investors have money in cash (on the “sidelines”) which is what propels the next upward leg.  At only 31% bullish recently (October 9, 2002), that number is as low as it has gotten in recent years and is likely marking a market bottom (finally!).

What To Expect From Here

Although long-term bonds have been the best performing asset class recently, they now ironically represent the most risk going forward.  If the current 45-year lows in interest rates do not hold, rising rates will be very hard on bond prices.

Prices will continue to respond to supply and demand, and markets will continue to loathe uncertainty.  Uncertainty has been in abundant supply and will diminish either as problems get addressed  (Iraq, the dock worker’s strike) or as we as a culture become more accustomed to the existence of certain clear and present dangers (terrorism).

Stock prices are reasonable, the economy is in modest recovery and any increases in consumer confidence should be short term positive for the stock market.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending


What it Measures

Last 3 Mos.

Last 12 Months

3 Years, Annlzd

5 Years, Annlzd

Standard & Poors 500

U S Stocks w/div





Russell 2000

Small Stocks





Morgan Stanley EAFE

Foreign Stocks





Wiesenberger Tech/Comm. Funds

Technology Funds





Real Estate Inv Trusts

Real Estate





Lehman Bros. Ag Bond












Source:  Weisenberger, Thompson Financial