Bubble... Bubble... Burst?

Chart of the Week for December 1-7, 2000

After last year’;s strong performance, the S&P 500 Index, the Dow Jones Industrial Average and NASDAQ Composite are all well into negative territory so far this year. The situation has only worsened in the last two months. Indeed, the S&P 500 Index, which rose 19.5% last year, has fallen (10.5)% so far this year. The Dow has declined (9.4)%, compared to a 25.2% rise last year. The Nasdaq Composite, which rose a strong 85.6% last year, has declined (36.1)%. This performance begs the question: Is the end near?

The equity market is not an isolated entity; it evolves in conjunction with the overall economy. It happens that the economy has been sending some signals indicating a slowdown. Gross Domestic Product, the aggregate of all goods and services produced, slowed considerably in the third quarter to 2.4%, the slowest growth rate since third quarter 1996. The National Association of Purchasing Managers (NAPM) Index is in contraction territory (below the 50% mark) for the fourth consecutive month in November. Accordingly, sales have slowed, which in turn has affected companies’ earnings. This helps explain the decline in the indexes.

However, so far, we have not seen a massive transfer of financial assets to fixed income securities, as is often the case when investors lose confidence in the equity markets. Moreover, inflation seems to be well-contained.

The truth is this: the end is never near from a long-term perspective. Indexes, sectors, market segments go up and down following economic cycles, but viable long-term opportunities always exist. To attain them, investors need to couple skilled stock picking with the sacrosanct rule: diversification, diversification, diversification.

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