10.10.20012001 Third Quarter Client Letter October 10, 2001 The tragic events on September 11th have affected everyone. This affect has contributed to the worst quarter in history for the U.S. equity markets with the S&P500 down nearly 15%. The short-term market response was decidedly negative. But in the long term – which is where most investors should focus – the financial markets are driven not by emotion or fear but rather by fundamental economic conditions. Sudden events throw the stock market into a state of uncertainty and fear, often causing an immediate drop. For example, President Eisenhower’s heart attack on September 26, 1955 caused a 6.54% decline in the Dow. President Kennedy’s assassination caused a 2.9% drop. The invasion of South Korea by North Korea on June 25, 1950 brought a 4.65% decline. Each event seemed earth-shaking at the time, yet the stock market recovered strongly thereafter. Is this event perhaps different? Perhaps, but when World War I broke out on July 28, 1914 all major European exchanges were closed and the Dow was down 7% on July 30, 1914. In 1915, the Dow rose 82%, its best year ever. The stock market often goes lower than maybe it should. Since the market peak in March 2000, the S&P500 is down 33%. This is the fourth time this has happened since 1965. It happened from December 1968 to May 1970, again from January 1973 to July 1974, and again from August 1987 to October 1987. Each time, the market rebounded strongly. Cumulative Returns 1 Year (%) 2 Years (%) May 1970 34.7% 52.7% July 1974 17.4% 42.4% October 1987 14.7% 44.9% In the short-term, the economic fundamentals will deteriorate with unemployment rising and consumer spending slowing. With $1.5 trillion currently in money market funds, the market could move to the upside quickly when investors are comfortable with U.S.’s economic future. History suggests maintaining a focus on the long-term is a sensible way to deal with short-term uncertainty. Thanks for you continued trust and support