Recent swings in the markets have made many investors feel uneasy. For more than two years "industry group outperformance" has meant either modest performance or somewhat less negative performance than in another industry group. This is a market characteristic that's not easy for many investors to tolerate. When the market is on the way up everyone feels great because retirement savings are growing and investors feel like they are moving forward, toward their investment goals. Conversely, when the market swings lower, investors don't feel as good about what they are invested in and may make a decision based upon their emotions to pull their dollars from the marketplace. By maintaining an unemotional business plan for investing, you can continue to move forward even through volatile market conditions.
Although investors have heard it before, and many don't believe it, the economy continues to show signs of recovery. GDP or gross domestic product, the broadest measure of the market value of the nation's goods and services, has increased, a sign of an improving economy. Corporate earnings have turned the corner into positive territory and appear to be moving forward. In the first quarter of 2002, 62 percent of the companies in the S&P 500 Composite, a compilation of the 500 most widely held common stocks, reported earnings that were better than predicted. This was a favorable surprise resulting partially from a growing economy. Past performance is no guarantee of future results. You cannot invest directly in an index.
Employment has steadied and more jobs are becoming available, meaning more people will have more to spend. The manufacturing sector is continuing to expand and industrial production has already shown signs of a bottom. In short, the country is producing more and is beginning to expand economically, resulting in a greater demand for workers and a return to profitability for corporations.
The service sector of the economy is also expanding and consumers are experiencing a growth in personal income, meaning people have more money to spend. Recent market dips have caused consumer confidence to slip a bit, but consumers continue to shop.
Recently, some investors have given up on stocks, while others are still trying to decide whether or not to remain invested in the market. Many investors are letting their emotions rule their investment decisions. This pattern of emotional decision-making is characteristic of the latest stages of a bear market, when the markets are reaching sold-out levels and their lowest valuations.
Most recently the signs of movement to cash, investors selling stocks, can be seen in the mark-down of many non-technology stocks. Growth managers began to sell these names in an effort to raise cash. Investors should instead consider looking to the future, re-allocating, rebalancing and reassessing their growth versus income needs.
Now is the time to move away from a pattern of investing by emotion and to talk with your financial consultant about building a structured business approach to investing.
Stocks often lead the economy out of a slowdown, but not always. In this slowdown they have not been a leading indicator (although other traditional leading indicators have been strong enough to overshadow the weakness of stocks.) Waves of disappointment in the recovery of stocks have led to decreased confidence in a comeback. However, over time, stocks move ahead of, and sometimes alongside and behind, the fundamentals of the economy.
Investors should continue to consistently work with their established, long-term investment plan and with their financial consultants to help reach their financial goals. Long-term planning can lead to financial success and it is never a good time to make emotional investment decisions. Now is the time talk with your financial consultant and develop a plan that will help you reach your long-term financial goals.
Editor's note: Jay Torgerson is a financial consultant and accredited asset management specialist with AG Edwards & Sons in Salem. Questions and comments can be directed to him at (503) 881-5353.