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rates.
The Fed disappointed Wall Street as they only
reduced short-term interest rates 1/2%, setting the
stage for the continuing decline of most stock market indexes
in February.
Adding more fuel to the stock market decline in February
were earnings reports. They continued to depict a
slowing U.S. economy and the reduction in corporate profits
and revenues in many sectors of the U.S. economy.
Many high technology bellwether companies continued to ratchet
down their forecasts of profit and revenue growth ahead
throughout February and March, fueling the continuing decline
of many stocks.
The biggest fear of investors is always uncertainty
about the future and the first quarter of 2001 escalated
these fears. It was just a few months ago that most high
technology companies were forecasting a rebound in their
sales as early as the second quarter of 2001.
Now many of the same high technology companies are singing
a different tune. This tune is that the abrupt slowdown
in the demand for their hardware and software is a shock
to them. In addition, most of the bellwether technology
companies can not predict when there would be a turn-around
in the demand for their goods and services. Most
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of
these companies were punished by Wall Street investors with
many of their stocks down more than 50% from their all
time highs that they attained in March 2000.
What a difference a year makes! In March of 2000, investors
couldn't wait to buy the high technology sector, irrespective
of the price that they paid. In March 2001, investors weren't
interested in the same stocks, even the ones that had plummeted
by more than 80%.
The Dow Jones Industrial Average (DJIA) held up the best
throughout February. However, it too was a victim to investors
who decided to punish the old economy stocks of the DJIA
starting in mid March, just prior to the Fed's regular meeting
on March 20, 2001.
The Fed did reduce short-term interest rates at the
March 20th meeting by 1/2%. Investors were again
disappointed that the Fed did not lower short-term interest
rates more, fueling a major sell-off of most stock
market indexes that day.
The high technology NASDAQ was the biggest loser in March,
closing the month at more than a two year low.
The DJIA and the SP-500 finished March regaining some
upward momentum, but both indexes were still down significantly
in March.
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The Bond market was the winner in the first quarter
of 2001, with most bond types offering investors positive
returns.
A silver lining for the U.S economy presented itself at
the end of March. The Treasury Yield Curve became positive
(The Treasury Yield Curve has been negative since January
2000). A positive yield curve means that longer maturities
offer a higher yield to bond investors than shorter maturities.
A positive yield curve during an economic slowdown
or recession, often accurately predicts an economic
turnaround within one year.
Foreign stock market investors got no respite in 2001. Most
foreign stock markets mirrored to decline in the U.S.
The worst may be ahead for many stocks as their earnings
reports for the first quarter of 2001 are released in April.
To protect my clients' assets I have reduced their
stock allocation weightings from 65%-70% to 25%-30%.
I have abandoned utilizing stock index mutual funds,
but have maintained my allocation weightings of the health,
energy and utility sectors, as a defensive hedge against
any further deterioration in the U.S.
economy.
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