2nd Quarter 2002  Newsletter
The second quarter of 2002 proved to be another frustrating period for investors. Generally improving economic data was
overshadowed by investors’ continuing concerns over corporate accounting scandals and political tensions around the globe.  Over the
first six months of 2002, the S&P500 Index fell -13.8%. The tech-heavy Nasdaq Composite declined -25% over the same period, and has
fallen a dismal -71% since its March 2000 peak.
1

In equity markets, Small Cap and Value stocks out-performed Large and Growth-oriented stocks, but generally posted negative absolute
returns. Most industries suffered in the second quarter, with investors seeking the safe haven of defensive stocks including consumer
staples, energy and utilities. U.S. Fixed Income indices posted moderate positive results, and a declining U.S. dollar helped the returns
of International Equity and Fixed Income.




















        Sources: CRA RogersCasey, Frank Russell Company, BARRA Inc.

Several indices tested their post-September 11th lows late in June, as investors digested more high profile accounting scandals from
WorldCom and Xerox.  With continuing concerns about the quality of corporate earnings, investors remain mistrustful of the modest
recovery in earnings forecasted by analysts and corporations for later this year. Continued turmoil in the Middle East and in Central Asia
also contributed to the rising risk premium demanded by investors.

Despite the corporate and geopolitical concerns of investors, a moderate economic recovery appears to be taking hold. Strong housing
markets and manufacturing activity, as well as gains in productivity, have contributed to healthy growth in Gross Domestic Product for
the first two quarters of the year. Consumer spending, which accounts for about two-thirds of
GDP, has also held up remarkably well,
although it has slowed somewhat in recent months. Interest rates remain at 40-year lows, with the Fed unlikely to jeopardize a fledgling
recovery with interest rate hikes in the near future.

Generally, the stock market acts as a discounting mechanism, with stock market returns leading the economy. Coming out of the past
nine recessions, the stock market hit bottom 4 ½ months before the economy turned around, according to data from Putnam
Investments in Boston.
2  In contrast, current market conditions appear to be out of sync with the economic recovery, as equity returns
have been dominated by the increasing fear and skepticism of investors rather than by the increasing strength of the economy.

While this dichotomy is not common, this is not the first time the economy and the stock market have behaved in this manner. The late
1970’s saw reasonable economic growth but meager stock market returns, and in the late 1990s the stock market expanded far faster
than did underlying economic conditions. In the short term, market returns are dominated by investor sentiment, supply and demand.
Over the long run, markets must return to the equilibrium established by corporate earnings and profits.
3 After such a dismal and
sustained period of decline, both history and valuations suggest that a substantial cyclical recovery may be in store for equity markets.
4

However disheartening recent market conditions have been, stepping to the sidelines to ‘wait it out’ carries with it a large potential
opportunity cost if the market’s inevitable upturn is missed. As a result, we continue to recommend a disciplined, long-term and well-
diversified strategy as the best way to meet your financial goals and objectives. We welcome the opportunity to discuss with you any
questions or concerns you might have about your investment portfolio.


Regards,



Robert Valentine




Endnotes:
1    Wall Street Journal, July 1, 2002
2    Standard & Poor’s Trends & Projections, June 20, 2002
3    Litman/Gregory Asset Management Quarterly Commentary, June 2002
4    Past performance is no guarantee of future results. Investors cannot invest directly in an index.
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