The InvestMentor

April 16, 2003

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In the movie based on the quote, a neurotic Melvin Udall remarks to fellow patients in the lobby of his psychiatrist's office, "What if this is as good as it gets?" Melvin was trying to improve perspective by modifying expectation. Good move. If we take nothing else from the recent Bear Market, it's that we ought to work to better manage our expectations.

And as I look at the potential for investors right now, it may be as good as it gets.

Not much else to hold out for...don't pine for the days of old—they're not coming back. Gone is the fairyland economy. Gone is the security of believing the country is impervious to terrorism. Gone is the Great Bull Market.

With my new set of lowered expectations in hand, I see a market that has bottomed, revived stature for our country amid myriad global threats, a recovering economy, and even a pick up in technology spending. While the landscape may seem murkier to others, we can measure our progress amid lowered expectations by keeping an eye on five important numbers.

When I say things like "the market's already bottomed," it's predicated on the notion that the market doesn't drop through the bear market-low set six months ago on October 9, 2002. The market, as defined by the S&P 500 Index (who said "what about the Dow?"...Have I taught you nothing?) closed at 776.76 on that day. That was the lowest point since early 1997 and if the market continues upward, it will be the official inception point of the new bull market.

The market has been trading "in a range" for the last nine months. It's bound on the bottom by the aforementioned 776.76 level. The top of the envelope is an S&P 500 closing level of 962.70 set on August 22 of last year. Below, the green line represents the ceiling set on that day, which the market has attempted to pass through on a few occasions since then. If we bust through 962.70, we'll be on a tear that I think will take us much higher by year-end. From current levels, it will only take about an 8% rise from where we are to break through that resistance level.

The Fed Funds rate has been at 1.25% for five months. I hope it stays there for a while. No lower, no higher. I'll be on the edge of my seat each time the Federal Open Market Committee (FOMC) meets until we get further along in this recovery. There is absolutely no reason for the Fed to lower. Fortunately, it would appear others agree—the Futures market puts the odds of a rate lowering before year-end at only 8%.

That's how big our economy is. Gross Domestic Product (GDP)—the measure of aggregate output—was $9.5 trillion at year-end. If First Quarter GDP comes in below that figure, it will mean the economy contracted. Put two of those kind of quarters together and we're back in recession. But right now, the economists polled by the Wall Street Journal predict that the First Quarter will show that GDP expanded at an annualized rate of 1.7%. They expect Second Quarter to show annualized growth of 2.1%. Should those prove true, we will have put up seven consecutive quarters of expansion. Absent contraction in 1Q, it will be very hard to deny that the economy is expanding, has been expanding, and will continue expanding. It's time the NBER pronounce the Recession dead as of Third Quarter 2001.

The Federal Reserve, in my opinion, deserves all the credit for keeping the last recession as mild as it was. Corporate spending slowdowns did not spill over into consumption, largely because the Fed was aggressive in rate cutting (think mortgage re-fi). But the Fed also grew the money supply, pumping dollars into the system. They've recently been re-tightening the spigot after flooding the economy with money, but we don't want them to go to far. In fact, if money supply growth gets down to 0.0% or lower, we could be in trouble. Collapsing money supply has proceeded the recessions of the last 30 years.

These figures help put our world in perspective and I know it ain't pretty out there right now, but it's as good as it gets. If you're not fully invested, what are you waiting for?