1.16.20012000 Fourth Quarter Client Letter In 2000, the U.S. stock market experienced the largest sell off since 1974. The markets started the year with a rally up to excessive valuations. The high priced stocks, particularly in the technology sector, were the most vulnerable to the market decline. For the first time since 1996, value stocks outperformed growth stocks. The major index returns for the quarter and year were as follows: 10/1/00 - 12/31/00 1/1/2000 - 12/31/2000 Dow Jones Indust. Average +1.6% -4.9% S&P 500 -7.8% -9.1% Nasdaq Composite -32.7% -39.3% Where do we go from here? The ideal environment for a bull market is one in which the downside risks to the economy are low but the perception is that these risks are high. The risk the economy is in or near a recession has increased. The Federal Reserve countered the recession risk by lowering interest rates ½% on January 3, 2001. This is a drastic move especially since it occurred in between formal meetings of the Federal Reserve Board and it was not a ¼% move. In the second half of 2001, the interest rate decreases should spur continued growth in the U.S. economy. Our recommendation is to remain patient as the market continues to be volatile. Portfolio re-balancing works best with volatile markets. Interestingly, as technology and foreign stocks were down in 2000, financials and healthcare were up. In 1999, the exact opposite occurred, technology and foreign stocks outperformed financials and healthcare. We will continue to re-balance by selling the strongest sectors and buying the under-performing sectors. Technology stocks continue to lead the market in earnings growth. In early 2000, they became over priced. With their recent sell-off, we expect technology to be an opportunity going forwards.