‘The Sun’ll Come Out, Tomorrow!’


The stock market followed similar patterns during the years 2003 and 2004, limping along for much of the year, going neither up nor down, and remaining as flat as a pancake through the summer. Then, as if toying with our emotions, it shot up in the last quarter and ended in positive territory for the year. We all breathed a collective sigh of relief.

Through Sept. 30 of this year, the S&P 500 was up 1.39 percent and the Dow Jones was down 1.99 percent. Once again, we've watched as the market has essentially moved sideways. Will we see a repeat of 2003 and 2004 as the market once again rewards us with a strong fourth quarter and ends the year with a positive gain for the third year in a row?

This is the hot topic of debate between those economists and financial forecasters whose every waking hour is devoted to making these kind of predictions, despite an abundance of evidence that such "forecasts" often turn out to be nothing more than a projection of the past on the future, and a natural human tendency toward overconfidence.

Not that everyone's overconfident today. On the one side are the optimists, encouraged by an economy of seemingly endless resiliency, with a relatively low unemployment rate and strong consumer spending, and a belief that the effects of hurricanes Katrina, Rita and Wilma will not be unduly severe. But on the other side lurk the pessimists, troubled by the hefty price of oil, signs of rising inflation, budget deficits, and what they believe is a housing bubble that has unnaturally sustained parts of the economy.

The truth is that no one has any idea how this year will end. Looking in the rearview mirror for clues as to the future is not only dangerous but a waste of time. If you drove your car that way, you'd simply crash into a tree. It's not the way to think about the market, either.

It's All relative!

And, finally, focusing on one year as if it were some kind of meaningful benchmark takes our eyes as investors off the big picture. Imagine that the S&P 500 ends 2005 down 4 percent, but then in January gains it all back and tacks on another 5 percent. Assuming you're still in the market, do you now care that the market ended 2005 down?

If you want to have some fun at the expense of others, go back and look at how Wall Street forecasters said the market was going to do in the year 2000. Unlike the baseball season – which ends every October and starts anew in the spring – the stock market is a serious game with a season that is truly long-term, hopefully forever. And just as no day or snowflake is exactly alike, no year is exactly alike either.

The issues concerning this market – oil prices, inflation, interest rates, deficits – are not going to disappear on Dec. 31.

But also not going away are the current strengths propelling the market – relatively low unemployment, strong consumer spending and the belief that the effects of recent hurricanes will be relatively benign.

This tug of war between conflicting economic currents will never cease. Still, our philosophy has always been that the country over the long-term will continue to grow and prosper, however bumpy, circuitous and nerve-jangling the ride may be.

In a world of so many variables — from extreme weather to terrorism to the direction of the Chinese yuan – what can we do? As much as we'd like to, we can't really control such things.

All we can do is control risk, by picking managers of integrity who run their funds with low expenses and minimal turnover; by diversifying to control risk; and by making adjustments to allocations at the margin.

Fred D. Snitzer is chief operating officer in the investment-management firm of Prudent Management Associates, specializing in high-net-worth and tax-deferred asset management.



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