4.10.20022002 First Quarter Client Letter Shortly after the terrorist attacks in September, the market reached its recent low. Confirming again, market lows are set when investor pessimism is high. This illustrates the opportunities created by investor’s fears. As investor fear rises, the equity markets bottom. Investor fear leads to panic selling. When the fear peaks, the markets typically bottom. Since September, the market has rallied substantially. The consumer and the Federal Reserve have performed miraculously to prevent a recession, defined as two consecutive quarters of negative gross domestic product (GDP) growth. GDP in the 3rd quarter of 2001 was –1.3%, but the 4th quarter GDP was +1.7%. For the year 2001, the GDP growth rate was +1.2%. The economy has continued to grow every year since the last recession in 1991. This further confirms the consumer spending will continue to increase as the baby-boomer approach their peak spending age of 47.5 in 2009. Typically, the U.S. economy recovers quickly from an economic slowdown. When the economy slows, consumers reduce their spending. This slow down in consumer spending creates pent up demand for future spending. Consumers want to buy goods and services, but wait until they feel comfortable about the economy and their finances. However, this time consumers continued to spend throughout the downturn; therefore, the recovery should be slower due to the lack of pent up demand. Is the coast clear? By no means! The stock market has now priced in a strong economic recovery. The market is at a cross road. The market is expensive compared to historical terms. If corporate profits grow quickly, these lofty stock prices are justified. Corporate profits are expected to bottom this quarter. If investors become complacent, assuming the economy will continue to rally, and they pile into stocks, then the market could be set to fall if corporate profits don’t rebound. On the plus side, investors have $2.7 trillion in money market accounts. This could be pent up demand for equities and push the market higher.