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The worst of the recession is over

March 27, 2002

The Federal Reserve confirmed what most of the market suspected for the last two months. The worst of the recession is over. The overall impression is that the economy is continuing to improve in March.  Unemployment claims have declined which has improved consumer sentiment. The recovery has entered a self-reinforcing stage. The Fed indicated that they no longer believe the biggest risk to the economy is slumping demand. This change in direction, while leaving interest rates unchanged, sets a new tone for bond and stock investors. The good news is that we no longer have to rationalize why the economy appears to have bottomed out. Both the Fed's and our focus now shifts to seeking signs that an economic expansion will have legs and eventually will carry all the sectors out of the doldrums.   

    Although it is too early to precisely time a move by the Fed to increase interest rates, our market strategist has surveyed the sectors that are typically hurt following the first Fed action to tighten rates in a new economic cycle. Looking at historical cycles over the last 25 years, he concluded that the financial, consumer discretionary and cyclical-based industrials are the most vulnerable over six and twelve month time periods. These sectors are market leaders in the late stages of an economic decline and during the initial stages of the economic recovery. They appear poised to pullback when the Fed begins to tighten.

    As you invest to meet your financial goals remember the general guidelines. Investing in quality companies and debt instruments is important. Investment decisions should be based on fundamental facts that enable you to estimate future price and income potential. A diversified portfolio can enhance growth and reduce exposure to unpredictable factors like political events and natural disasters. 

    A financial goal of many Americans is a college education for their children and/or grandchildren. Saving for a college education requires disciplined financial planning and a well-crafted investment strategy. State sponsored Section 529 College Savings Plans offer a tax-advantaged product that makes saving and investing for college both convenient and effective. 

    Section 529 of the Internal Revenue Code created the College Savings Plan in 1996, a 529 plan is a qualified, state sponsored program for tax-free college savings. The plan can be used to pay for education costs at any eligible college, university or graduate school in the United States. Major improvements to this Plan have occurred as a result of the new tax law passed by Congress in May of 2001. These changes are effective as of January 1, 2002. 

    There are other college savings vehicles, including Education IRAs, Uniform Gifts to Minors Act, Uniform Transfers to Minors Act and Series EE Savings Bonds. If college saving is in your future look into the benefits offered by the 529 savings plans and other alternatives. Remember, there is no greater gift than the gift of knowledge.

    Nancy Hadley is an investment representative with D.A. Davidson in downtown Sandpoint.

 

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Landon Otis

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