3rd Quarter 1999

By Scott Lummer
Chief Investment Officer, mPower

During the third quarter U.S. stock prices were highly volatile -- rising in July, showing some signs of uncertainty in August, and declining precipitously in September. Nearly all of the sectors declined during the quarter. The S&P 500, a measure of large company performance, fell by 6%, while small company stocks, measured by the Russell 2000, decreased by 8%. Both value and growth stocks declined. Bonds were flat during the quarter. The benefits of international diversification were in evidence, as broad-based international stocks rose by 4%, although emerging market stocks fell by 8%.

There were three main reasons for the fluctuations. First, economic data show that there are signs of increasing inflation, and previous attempts by the Federal Reserve Board to slow economic growth have not proven successful. This has led to fears of higher inflation and interest rates. Second, there is concern about the continued growth of corporate profits. The relatively high corporate valuations in July were based on the continued healthy profits reported during that month, but many analysts doubt whether continued excellent performance can continue. Third, there is anxiety over the valuations of particular sectors in the market, particularly high technology stocks.

These three factors will likely continue to cause stocks to oscillate during the final quarter. Of the three, I am most concerned about the potential for sector overvaluation. The risk exhibited by the two others, inflation and earnings uncertainty, appears to be mainly based on short-term factors, and has already manifested itself in a 10% decline in values. Although these factors could cause minor dips, it is unlikely that they will cause a major shift in values in the future. However, a severe decline in a sector could harm investors who have over-allocated their money into industries that they felt would outperform the market. During chaotic periods it is most important to practice broad diversification. It is important for you to research your investment funds to detect potential under-diversification, and adjust your portfolio to avoid any extreme risks.

In my July commentary, I stated two reasons why that the market might not perform well in the third quarter:

"If the Fed senses the potential for an increase in inflation, it may very well increase interest rates again before autumn, which will dampen stock prices. A second and more serious concern is about corporate earnings. The relatively high stock valuations in today's market reflect optimism about continued growth in profits. If many companies announce earnings below expectations, we will see a potentially severe decline in stock prices."

I point this out merely to illustrate that the volatility displayed over the past month is not surprising, and should not affect your long-term investing strategy. While there is always a tendency for investors to want to react during turbulent times, the proven best approach is to maintain the policies that were followed during more stable periods. Now is not the time to change your strategic allocations. Long-term stability in allocations is the method that repeatedly has produced successful portfolio results.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

3rd Quarter 1999

By Scott Lummer
Chief Investment Officer, mPower

During the third quarter U.S. stock prices were highly volatile -- rising in July, showing some signs of uncertainty in August, and declining precipitously in September. Nearly all of the sectors declined during the quarter. The S&P 500, a measure of large company performance, fell by 6%, while small company stocks, measured by the Russell 2000, decreased by 8%. Both value and growth stocks declined. Bonds were flat during the quarter. The benefits of international diversification were in evidence, as broad-based international stocks rose by 4%, although emerging market stocks fell by 8%.

There were three main reasons for the fluctuations. First, economic data show that there are signs of increasing inflation, and previous attempts by the Federal Reserve Board to slow economic growth have not proven successful. This has led to fears of higher inflation and interest rates. Second, there is concern about the continued growth of corporate profits. The relatively high corporate valuations in July were based on the continued healthy profits reported during that month, but many analysts doubt whether continued excellent performance can continue. Third, there is anxiety over the valuations of particular sectors in the market, particularly high technology stocks.

These three factors will likely continue to cause stocks to oscillate during the final quarter. Of the three, I am most concerned about the potential for sector overvaluation. The risk exhibited by the two others, inflation and earnings uncertainty, appears to be mainly based on short-term factors, and has already manifested itself in a 10% decline in values. Although these factors could cause minor dips, it is unlikely that they will cause a major shift in values in the future. However, a severe decline in a sector could harm investors who have over-allocated their money into industries that they felt would outperform the market. During chaotic periods it is most important to practice broad diversification. It is important for you to research your investment funds to detect potential under-diversification, and adjust your portfolio to avoid any extreme risks.

In my July commentary, I stated two reasons why that the market might not perform well in the third quarter:

"If the Fed senses the potential for an increase in inflation, it may very well increase interest rates again before autumn, which will dampen stock prices. A second and more serious concern is about corporate earnings. The relatively high stock valuations in today's market reflect optimism about continued growth in profits. If many companies announce earnings below expectations, we will see a potentially severe decline in stock prices."

I point this out merely to illustrate that the volatility displayed over the past month is not surprising, and should not affect your long-term investing strategy. While there is always a tendency for investors to want to react during turbulent times, the proven best approach is to maintain the policies that were followed during more stable periods. Now is not the time to change your strategic allocations. Long-term stability in allocations is the method that repeatedly has produced successful portfolio results.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.