- The Washington Times - Wednesday, January 1, 2003

Stocks, depressed by worries about war, terrorism and corporate crimes, fell for a third straight year in 2002 in their worst performance in more than six decades.

Most Wall Street gurus are hopeful that the market will pull out of its historic slump, as long as the economy keeps recovering and small investors don't get spooked and desert the market.

"It's been a difficult and frustrating year, one where the things investors normally care about, like interest rates and earnings, took a back seat to geopolitical events and images of handcuffed CEOs," said Carl Domino, president of Northern Trust Value Investors.

The Dow Jones Industrial Average, reflecting the loss of confidence in blue-chip companies disgraced by scandal, fell 17 percent, after declining 6 percent in 2000 and 7 percent in 2001.

The Standard & Poor's 500 index dropped 23 percent, while the technology-driven Nasdaq Composite Index plummeted 32 percent and some European indexes crashed by more than 40 percent. The U.S. indexes have lost from 27.5 percent to 67 percent of their value in the past three years.

Hopes were raised by a strong rally in the market during October and November after the indexes fell to five-year lows Oct. 9. But December turned out to be the worst month since the Great Depression, with both the Dow and S&P posting losses of more than 6 percent.

A retrenchment in consumer confidence last month which, in part, reflected the reversal of fortune in the market, as well as declining job prospects tugged at the indexes on the last trading day yesterday. The Dow ended a shaky session up just nine points at 8,342.

"Let's get this year over with; it's been one of the worst," said Gary Dugan, head of global equity market strategy at J.P. Morgan Fleming Asset Management.

After spending much of the year absorbing the shock of corporate scandals which forced the biggest changes since the 1930s in the way Wall Street does business the market closed the year amid jitters about a war with Iraq and soaring oil prices.

"We're certainly entering the new year with a lot of trepidation," said John E. Carey, executive vice president of Pioneer Investment Management.

Mr. Carey hopes the economic recovery will continue this year and produce better profits for businesses. But like many of the bulls on Wall Street who have been chastened by the market's long and deep slump, he does not expect a robust rebound in the new year.

"We don't foresee any broad trends that investors can simply ride as they did with technology in the 1990s," he said. "Close analysis of companies will be the key to success."

Edward Yardeni, chief investment strategist with Prudential Securities, called on investors to "think positively," focus on the economy's strengths and stop worrying about every event that crops up.

Mr. Yardeni ticked off a long list of worries that plagued the market in the past year: double-dip recession, Iraq, terrorism, anthrax, smallpox, deflation, China's exports, the U.S. trade deficit, the weak dollar, high consumer debt, the negative wealth effect, unemployment, the housing bubble, business debt, stock options, underfunded pensions, Brazil and widening budget deficits.

"I honestly can't think of anything else to worry about," he said, noting that the market was "comprehensive" in its focus on risks.

"Enough is enough," he said, adding that U.S. consumers prevented investors' worst fears from being realized by maintaining spending and keeping the economy afloat.

Mr. Yardeni conceded, however, that the chance of a double-dip recession that zaps corporate earnings remains "high." He said the current depressed levels of interest rates reflect fears that the United States will fall into a Japan-style deflation. This, he said, could lead stocks to pick up only when interest rates rise, contrary to their usual behavior.

Jay Mueller, portfolio manager with Strong Capital Management, said the economy should avoid a destructive bout with deflation, but added that the recovery will continue to be held back in a kind of payback for the market's 1990s excesses.

"We've gotten off to a very slow start in this expansion because we're still dealing with the overhang of the '90s bubble," he said. "We're probably not through that process," he added, predicting that growth will be "retarded for a few more quarters."

The only possibility for an "explosive" rally on Wall Street, according to Strong, is if President Bush proposes and Congress enacts a cut in the tax stockholders pay on dividend income. That would immediately make stocks more attractive than bonds and other investments, it said.

A few forecasters remain optimistic that stocks and the economy will snap back with a vengeance this year.

"It's payback time for those who suffered through the bust," said Diane C. Swonk, chief economist with Bank One. She estimated that the market is at least 25 percent undervalued in light of the recovery in the economy and profits.

"The economy is on even stronger footing than it was a year ago, when it defied most forecasts," she said. "It will continue to dazzle with its resilience, if not brilliance."

C. Kim Goodwin, chief investment officer at State Street Research, said a crisis of confidence brought on by corporate fraud kept the market from rebounding in 2002 but that should not be an obstacle this year.

She predicts that stocks will rise 10 percent on average in 2003, in line with their historical average. "I am optimistic because investors are more confident," she said.


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