The Stock Markets

Analyst’s predictions for a post-election improvement in the U.S. stock market have been put on hold, as the outcome remains uncertain.   The inability to declare a winner has resulted in instability for the markets.   The historically strong seasonal period of November through March has gotten off to a rough start due to the election gridlock and a slowing economy.  Since November 7th, the S&P 500 average is down 6% while the Nasdaq has fallen 18%.  So far, the year 2000 has been the worst year for technology stocks since 1985.

Election matters aside, there are three differing opinions as to why the market has struggled. Two of them compel us to be buyers of the current market, as signs of relief are in sight, while the implications of the third could be cause for a bit more concern if you are invested in the wrong securities.

1) “We produced too much stuff.”  The strong economy of the past few years has left many companies with an excess of product inventory.  Once these products have been worked off, however, corporate profits should return to previous levels.  Inventory corrections such as these typically last 2 to 3 quarters.

2) “The economy is slowing.”  Signals that the US economy is slowing more rapidly than expected have raised concerns among investors about the outlook for near-term corporate profitability.  Some good news, however, is potentially around the corner.  On November 5th, Alan Greenspan assured that the Federal Reserve is concerned about the economy slowing too much and promised swift action should that trend continue.  This implies that the Fed is done increasing interest rates, and its next move would be to ease them.

3) “We are entering a new age of technologies.”  Citing an overall softening of computer demand both in the US and overseas markets, PC producer Gateway Inc. recently warned of a sharp decline in sales demand for the rest of the year and into 2001, leading to an expected net loss for the 4th quarter.  Technology is evolving from the dominant PC to smaller hand-held devices such as cell phones and personal digital assistants.  As a result, a new generation of companies geared towards smaller, faster, and usually wireless computing is being born.

We believe the market may be near a bottom.  The perceived policy change of the Fed along with strong seasonal factors indicate now is the time to be a buyer in the stock market.  The market has a renewed focus on historical valuation methods such as earnings and revenue growth.  No longer will adding “.com” to your name reward your stock price.