3rd Quarter 2002 Newsletter
Just when we thought it couldn’t get any worse… it did. The quarter began with a strong sell-off in July, prompted by further deterioration of
market sentiment in the face of continued corporate malfeasance.
Equity markets staged a moderate recovery in late July and early August, only to decline again in late August and September, with many
indices falling below July’s lows. With the Dow Jones Industrial Average falling -17.87% and the S&P500 Index off -17.29%, the Third
Quarter of 2002 was the worst equity markets have experienced since the crash in the fourth quarter 1987, and September’s -12.37%
decline was the worst September since 1935, 65 years ago.1
Investors categorically spurned ‘risky’ assets, as U.S. Equities plunged across all sizes and styles, along with International Equities, REITs
and High Yield bonds. Domestic and International Fixed Income continued to provide a safe haven for investors, with the Lehman
Aggregate Index up 4.58% for the quarter.
Source: Security APL. Past performance is no guarantee of future results. Investors cannot invest directly in an index.
In the face of so much bad news, it’s only human to feel frustration, fear and capitulation. It’s only natural to consider making an emotional
decision about your investments. Many investors have understandably considered stepping to the sidelines – just until markets seem to
return to ‘normal.’
Consider the following market illustration from the 1973 – 74 bear market :
The value of $1,000,000 invested in the S&P500 Index on January 1, 1973:
6 months later… $896,310
12 months later… $853,450
1 year, 9 months later… $573,780
In October, 1974, as we are now, investors were then faced with back-to-back losing years, and the worst bear market in decades. And like
now, many investors considered stepping to the sidelines until markets returned to ‘normal.’ This illustration emphasizes the importance for
long-term investors of time in the market rather than timing the market.
Value of $573,780 removed from the Market
on 10/1/1974 and invested in a 5% CD Value of $573,780 invested in the S&P500 Index on 10/1/1974
6 months later… $588,130 6 months later… $771,570
12 months later… $602,470 12 months later… $792,620
2 years later… $632,590 2 years later… $1,034,040
5 years later… $732,300 5 years later… $1,247,680
10 years later… $934,620 10 years later… $2,444,370
Past performance is no guarantee of future results. Investors cannot invest directly in an index.
According to a number of market analysts3, equity markets now appear substantially undervalued by virtually any measure. Just as markets
overreacted on the upside in the late 1990s, they now appear to be overreacting on the downside. As your financial advisor, we offer our
experience and our support, and our advice to adhere to your disciplined investment strategy.
We remind you that ‘staying the course’ does not mean inaction – the Portfolio Strategists and Investment Managers directing your
investments are constantly evaluating current market conditions and re-validating their assumptions to ensure your portfolio reflects the
very best thinking these institutions have to offer.
We welcome the opportunity to further discuss your portfolio with you, and to confirm that your current investment strategy reflects your
long-term goals and objectives.
1 Wall Street Journal, October 1, 2002
2 Salomon Smith Barney Consulting Group, “When the Going Gets Tough, The Tough Hang In There”
3 Including Litman/Gregory Asset Management, PanAgora Asset Management, UBS Global Asset Management, and Morgan Stanley
Investment Management in their respective Third Quarter 2002 Portfolio Strategist Commentaries.
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