February 2003 Commentary DOW JONES INDUSTRIAL AVERAGE (DJIA) Price

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					February 2003 Commentary
 DOW JONES INDUSTRIAL AVERAGE (DJIA) Price 7524.1                                                     StockVal®
  72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07





                                                                                                          HI   11723
                                                                                                          LO     602
                                                                                                          ME    2149
                                                                                                          CU    7524
 2600                                                                                                     GR   7.1%
                                                                        Gulf War
 1800            1973-74
 1400             Crisis



Waiting for a War - Fear, uncertainty and opportunity

Iraq, Iraq, Iraq. That has pretty much been the story of the past month and the jittery financial markets are
responding to the daily reports of the international crisis. The stock market is hovering around its October 2002
lows, at levels first reached in 1997, and interest rates continue to post new 45-year lows.

Fear and uncertainty rule the day. Investors have grown even more cautious. There is now nearly $3 trillion in
money-market and savings accounts. While all this money is earning less than the rate of inflation, at least it's
safe. Safety in the near term, however, could jeopardize investor's longer-term financial security. According to
the Wall Street Journal , just 73% of workers participated in their company's 401(k) retirement savings plan last
year, the lowest level since the early 1990s. This is down from a peak of 77% in 1999. According to the Journal ,
"The drop is particularly alarming because falling share prices mean many workers need to sock away more
money, not less, to meet their retirement needs. If the trend continues, it will mean that workers will either have to
work longer, live on less in retirement, or dramatically boost their savings in their later years to catch up." This
trend is alarming, but hopefully only temporary as investors begin to focus on their longer-term financial needs.

The participants in the financial markets are hoping for a quick resolution to the Iraq crisis. Everyday that the
crisis drags on is another day that business investment and hiring plans are put off. This inactivity is costing the
American economy dearly and jeopardizing the nascent economy recovery. In addition, other strains are being
placed on the economy. Crude oil is above $35 a barrel and consumers are paying more to heat their homes and
refuel their automobiles. The extra amount that consumers must spend on energy reduces the amount they can
spend on other consumer goods, further reducing economic activity and increasing the risk of another recession.

The good news is that some sort of resolution to the Iraq crisis seems near. An American-lead invasion, with or
without allies, seems a near certainty. War shouldn't be considered a positive event, as war is frought with risks
and is always very costly, but it could reduce some of the current uncertainty hanging over the economy. And
while other challenges will inevitably arise, any reduction in uncertainty will enable companies to get back to
business and allow investors to focus on their longer-term financial needs.
 DOW JONES INDUSTRIAL AVERAGE (DJIA) Price 7524.1                                                    StockVal®
     72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
                                                                                                        equity risk
                                                                                                        premium in
                                                                                                         30 years!


 3                                                                                                       HI    6.67
                                                                                                         LO   -2.95
                                                                                                         ME    2.70
 2                                                                                                       CU    6.67




                                         EQUITY RISK PREMIUM

The current angst-filled environment is not new and markets have survived them before, according to Tobias
Levkovich of Citigroup. "Terrorism concerns, international war fears, spiking energy prices, mideast turmoil, U.S.
troops in various overseas involvements, tension on the Korean Peninsula, anti-war protests, emerging countries
nuclear ambitions, budget deficits, and a stock market still dealing with the aftermath of the bubble bursting are
on everyone's mind. Sound familiar? Yes, just as you guessed, we are describing ... the 1970s!"

The aftermath of the Nifty-Fifty stock price collapse and the 1973-1974 energy crisis, alongside the resignation of
the U.S. Vice President and then later the President, devasted consumer, corporate and investor psyches. The
war in Vietnam and Cambodia was broadcast via TV into every living room, as was the terrorist attacks at the
Munich Olympics and a spate of airline hijackings. Roe vs. Wade and the first test-tube baby split the nation on
religious and social grounds, while "Bloody Sunday" in Northern Ireland underscored religious strife. On top of all
that, India joined the nuclear arsenal family by successfully testing an atomic bomb in 1974. Interestingly, today
many of the issues are the same, we just have different players.

During the mid to late 1970s, the equity risk premium, which is the extra return that investors require over currrent
interest rates to invest in stocks, reached levels not seen again until recently (see chart above). During that time,
the stock market didn't see a cataclysmic crescendo of capitulation in the form of a massive one-day sell-off to
signal the bottom, but rather turned with a whimper and then with a growing sense of disbelief. Then, by July
1975, the market had climbed more than 50% from the October 1974 trough.

Certainly, there are differences between the 1970s and today. There is no Watergate and no spiraling inflation.
Stock price / earnings multiples are about twice the levels seen in 1974, but inflation today is less than half of
what it was then. The U.S. military is held in high esteem, as is the office of the Presidency. And, while energy
prices have jumped, the increases on a percentage basis are not as great as they were in 1973-74. Oil prices
jumped from less than $2 per barrel in late 1973 to $12 per barrel a year later. Thus, the pain of the move in oil
prices from $19 per barrel just over a year ago to $37 currently is far from equivalent.

Perhaps every generation of investors must re-learn the lessons of the past, but market history shows that the
financial markets can and have indeed survived challenging periods such as these. Clearly, many issues will
remain long after Saddam Hussein is deposed and worried investors may have to wait indefinitely for all the
geopolitical risks to subside. Investors may simply have to become accustomed to investing in a world of greater
uncertainty. The flip side of uncertainty is often opportunity.