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Market Outlook

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The stock that looks weak may be your best bet

A new year has arrived; as we reflect over the past twelve months and prepare to move ahead no one should forget or sell short the American spirit. There were many lessons to be learned from the events during the past year and we can emerge from them a stronger people and nation.

    As we look ahead, keep in mind that bear markets do not last forever. Many economists are seeing signs of recovery; the world economy is doing better than some expected. The economic data continues to reflect signs that the economy may in fact be working its way through a bottoming process. We are still cautious and expect volatility for the next few months.

    The market averages are expected to advance between 8% and 12% over the next twelve months reflecting improving revenue and earnings expectations and low competitive returns offered by bonds and money market funds. The economy should begin to recover before mid-year, but we suspect the recovery will deliver some new surprises.

    Looking at the five major market sectors, we expect to see balanced market performance from consumer spending (low interest rates and improving income expectations), industrial production (replenishing depressed customer inventories), financial services (expanding profit margins as loan portfolios begin to expand) and healthcare (new products coming from biotech and attractive relative valuation offsetting patent expirations for several large drug companies). The tech and telecommunications sector might lag due to current revenue and earnings estimates proving difficult targets to achieve.

    The best investment decisions are made when considering your own individual time horizon and risk tolerance for each investment. Many people have taken advantage of the low home mortgage rates that were available. They might not have hit the lowest rate 6-6.25% but even a 6.5% rate is pretty good. Similarly, the Dow Jones Industrials are down about 12.5% from two years ago (through 12/31/2001) and stocks may offer the best values in years. Many people, however, wait for it to rebound before they invest – they are waiting for a “better rate”. The stock market, like a mortgage, is a long-term commitment. I believe dollar cost averaging is an excellent way to begin investing in the market today.

    Dollar cost averaging is a strategy of making regular investments over a long period of time. The advantage is that you can buy more shares when the price is lower and fewer shares when the price is higher.

    You do not have to be a Wall Street guru to benefit from dollar-cost averaging. In fact, if you are making automatic deposits from your checking account into a mutual fund or re-investing stock dividends, you are already dollar-cost averaging.

    In my opinion, the main advantage of dollar cost averaging is it may help prevent you from being emotionally whipsawed by the market. It is human nature to be frightened away from owning stocks or bonds when prices head down even though experience has shown that such times may be the most opportune. Dollar-cost averaging brings a discipline to investing because it ensures that you invest in different market environments.

    Stocks are sometimes the strongest when they look the weakest and the weakest when they look the strongest.

 

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Nancy Hadley

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