Marketing Commentary- Q4 2002

The stock market returned to a more normal pattern this past quarter with two steps up (October and November) and one step down (December), for a net positive gain.  Bonds continued to ride the ethers of unsustainably low interest rates and the high velocity euphoria of billions of dollars liberated by home re-financings.  In all, it was only a moderating finish to a murderous year.

Trends to be Aware of

Last quarter, we wrote that investors were too bearish and that correctly presaged a quick bounce upward in the stock market.  But rare bouts of optimism are tethered and constrained by concerns over war and terrorist reprisals.  Sentiment levels, both of consumers and businesses, will be determinative in the recovery.

The bond market doubts there will be a double dip recession.  High yield bonds, representing loans to higher risk, lower investment grade corporations, have seen their prices rise as default rates have fallen.  Discounts on some of the closed end bond funds we watch have disappeared, with some trading at premiums of 5% to their net asset values.

Sentiment will continue to bounce with the markets.  Recently, consumer sentiment has been showing a 90% correlation with the direction of the stock market, so mood swings are to be expected.

In the past, the stock market has been a leading indicator.  Stocks usually rise six months before the end of a recession, on average, pricing in the coming good news.  We may be seeing the reverse this time, in which stock prices have lagged the economic recovery because investors’ fears and uncertainties trumped the good economic news.  If that is true, the apparent under-valuation of stocks today (12-30%) will prove to be true, stock will rise and bonds will suffer.

Some Numbers for Comparison:
The following table compares the main indices against which fund performance is measured.  All figures are for the periods ending 12/31/02.

Source:  Thompson Financial