LFM&P
Linnard
Financial Management & Planning, Inc.
Registered Investment Advisor
January
2, 2003
Outlook & Trends
As we finish 2002, we have experienced another unusual
and extreme year with interest rates near 40 year lows, and the longest stock
bear market since the Great Depression. During these times, when it is
definitely not “business as usual”, it is helpful to have a perspective of
where we are in the continuous flow of economic events, as well as having a
financial plan as a guide. Hopefully
this letter will help you with the perspective.
The economy continues to try to find its footing. Interest
rates were recently lower than any time since 1963 because the Federal Reserve
is flooding the banking system with money in an effort to re-inflate the
economy. Much of that money is going straight into savings accounts and
providing mortgages for homebuyers. Consumer spending has kept the economy
alive. Consumers have found bargains in new and refinanced low interest rate
loans for houses and cars as well as computers and other technology items. Low
prices however also mean low corporate profits, which result in unemployment and
lackluster stock market performance.
Because of the strength in the consumer and service areas,
the economic malaise has been restrained, but perhaps has lasted longer than
usual. In many ways conditions resemble the economic downturn of the early 1990s
(including a possible war in Iraq), which followed the real estate boom of the
1980s and the subsequent Savings and Loan implosion. If the unemployment rate
peaks here at 6%, it will be the lowest unemployment peak during any recession
since 1972. In fact, during the expansion periods of the 1980s, it was thought
that unemployment might not ever get much below 6% again after hitting a
high of 11%. Unemployment however is affecting consumer confidence, but surveys
suggest people believe conditions will be better in 6 months.
The stock market registered at least a temporary bottom
during early October. NASDAQ stocks, which are heavily represented by technology
companies, led the advance during the last quarter, but all sectors
participated. It is yet to be seen whether this gain is sustainable.
Rising profit expectations are one of the elements that
drive stock prices higher. Other elements that contribute are low interest rates
and a growing willingness of investors to accept risk. As mentioned above,
interest rates are very low, so this is supporting stock prices. Analysts’
expectations of future profits have not changed significantly for the last year
and a half, and this creates a drag. Lastly, it is not clear whether
investor’s risk aversion has reached a maximum level or not. Individual
investors are clearly not enamored with stock investment, but market
commentators are perhaps too optimistic.
Paradoxically, the best time to buy stocks is when risk
aversion is at its highest and nobody wants to own them. Unfortunately, bottoms
in financial markets can only be identified with any certainty well after the
fact. It is reasonable to think that at some point earnings expectations will
improve. When they do, stock prices will begin to rise. As they rise, investors
will become less skeptical and some of the money gathering in savings accounts
will find its way into stocks, fueling a new advance. As stocks rise and the
economy expands, it is also reasonable to expect that interest rates will rise
again, bond prices will fall from their current highs, and the
mortgage-refinancing boom will be over, for at least several more years.
The best way to navigate through uncertain times is to have
a plan and a defined strategy to follow that fits your individual needs and
goals. Although the future movements of the financial markets cannot be foreseen
with precision, it is the long-term perspective that will ultimately define your
success in your financial future. Fortunately, it is not necessary to know the
unknowable. Over a lifetime, good and bad economic conditions come and go. It is
more important to define and maintain a strategy that works for you and can be
expected to deliver the results you wish. Depending on your outlook and
temperament, your strategy could adjust for cyclical economic changes or attempt
to insulate you from the adverse results of change.
During times like these, having a sound financial and
investment plan can help you to keep focused on what’s important – your
financial goals and obligations, regardless of the current conditions of the
financial markets. Your plan should reflect how you expect to meet your life
needs and map out a strategy with which you are comfortable. Knowledgeable
confidence helps you to not be sidetracked by the temporary conditions occurring
at any given time.
Historically, equity investments have been the only way
to stay ahead of inflation and taxes and the best way to accumulate savings for
retirement and children’s education costs. However, as has become quite clear
over the last several years, equity investments can involve considerable risk,
so it is important for your plan to consider risk, especially for those
investors who must withdraw income in the near future.
If you would like help managing your investments or
planning how to your reach your financial goals, please give us a call.