Over the long term,
the economy ultimately drives financial markets, but the public's sentiment
often swings
the market wildly both above and below what might be considered a 'reasonable
value'. With the economy
(and profits) recovering from last year's recession and interest rates remaining
low, the Standard and Poor's
Index now appears well below a reasonable value. But sentiment is as fearful
and pessimistic today as it was
giddy and euphoric before the turn of the millennium.
It's difficult
to blame investors for their current negativism. In a mere nine months, we have
been through confidence-shaking
events that would have been unimaginable one year ago: a major terrorist attack
on our shores,
the collapse of Enron and the accompanying accounting issues that surfaced,
corporate governance issues
and the U.S. corporate world's fall from grace. Compounding those problems is
the poor timing of the dollar's
recent retreat from multi-year highs and the result is a market that is now
driven by fear, not the fundamentals.
While it is impossible
to pinpoint the bottom before it happens, we believe that the market has now
wrung out
most of the excessive optimism that existed at the tail end of the last advance.
Additionally, as we go through this
political and regulatory cleansing process, the result will be an even more
transparent, stronger and more fundamentally
appealing system. Another key characteristic of the first phases of recovery
from a bear market is that
even as the fundamentals improve, they continue to be ignored. We believe we
are in that process right now,
as positive developments supporting our view include:
Strengthening economy.
The economic recovery is healthy and, once again, gaining momentum. Monetary
policy is now expected to remain stimulative to ensure the economic recovery
and to contain any potential damage from the stock market's behavior. In addition,
inflation is not
a concern.
Improving earnings.
Importantly, earnings are improving. The strength of this recovery will be an
important determinant for investor confidence and the outlook for capital markets.
A better-than-expected outcome is increasingly likely because of current skepticism,
and could have a powerful positive
effect.
Technical evidence
of an oversold market with significant upside potential. We are seeing increasing
statistical evidence that we are near a market bottom. The Investors Intelligence
indicator and its components
are at or close to bullish levels for the overall market. The CBOE Volatility
indices, the VIX and the VXN
have both recently crossed upward into ranges that which historically have seen
upside moves develop quickly.
Momentum is oversold and short positions, partially reflecting the growing number
and influence of hedge funds,
are at record levels.
Therefore, this
is not the time to abandon longer-term investment strategies. Equities remain
the asset of choice
for long-term investors. We believe that patience and perseverance through this
difficult time should provide
attractive opportunities once the market begins behaving in a more rational
manner. This is an opportunity
to review your risk tolerances, return objectives and diversification goals.
The information
in this communication has been obtained from sources believed to be reliable,
but its accuracy and
completeness are not guaranteed. Any opinions expressed herein are subject to
change at any time without notice.
Based upon varying considerations, the management of individual accounts by
Northern Trust Global Investments
may differ from the recommendations above. Any person relying upon this information
shall be solely
responsible for the consequences of such reliance. This report is provided for
informational purposes only and
does not constitute an offer or solicitation to purchase or sell any security
or commodity.
