BACK • 
"Irrational Pessimism"
March followed a weak February and mercifully ended the first quarter- one of the worst in history. For the month, the Dow Industrials lost 5.9%, the S&P 500 dropped 6.4%, the NASDAQ Composite tumbled 14.5% and the Russell 2000 lost 5%. For the quarter, the Dow was down 8.4%, the S&P 500 lost 12.1%, the NASDAQ dropped 25.5% and the Russell 2000 lost 6.8%. So much for "spilled milk."
For those of you with a good memory, I used the title "irrational pessimism" once before in the nearly 20 years of writing in this space. It happened in September 1998 after August of '98, when the Dow Industrials lost 13.1%, the S&P 500 lost 14.6%, the NASDAQ dropped 19.9% and the Russell 2000 lost 19.5%. As the title implied then, and implies now, things have gotten way out of hand. To paraphrase the Fed Chairman, the market has gone too far.
For the remainder of 1998, the NASDAQ added 46.3%, the Russell 2000 gained 24.9%, the S&P 500 added 28.4% and the Dow Industrials gained 21.8%. Most of us still fondly remember the entire terrific 1999 and the following first quarter of 2000 before the current bout of "irrational pessimism" that now enters its 13th month.
Are there similarities between then and now? Back then we also had low rates of inflation, low interest rates, and low unemployment with the possibility of huge budget surpluses. There was lots of trouble around the world, including an Asian meltdown. In domestic politics, there was that looming event called impeachment, because you-know-who did you-know-what.
But, more than anything else, the similarities between then and now involve our friends the "gloom and doomers." Again, all the people who have been wrong for most of the '90s, in fact, for most of the last seven decades, are trumpeting their special kind of fear, gleefully trying to aggravate a situation that has already gone too far.
In the meantime, can any one say, "SOFT LANDING?" Late last year it became apparent that the incoming Bush team wasn't just trying to "rain on our parade," but was actually ahead of the curve regarding weakness in the economy. Then I said that we were headed for a slowdown, NOT A RECESSION. But, led by the gloom and doomers, the market has systematically discounted the worst possible outcome, including a prolonged recession. Clearly, today we have two economies: the manufacturing sector, which represents about 15% of the economy and is in a recession, and the service sector that makes up the rest of the economy and remains relatively healthy. Additionally, housing and automobiles remain relatively strong. While we see the economic glass at least half full, the "gloom and doomers" have managed to convince many that it might be completely empty. This is foolishness. I tend to believe that the market is acting far worse than the economy actually is.
Of course, I understand that the big question still must be, "Yes, but when will the market start to act better?" The only honest answer is, "Nobody really knows." It just seems to me that most everyone is far too bearish and far too frightened. The economy is sending mixed signals, not perilously weak signals. You have a Fed that cut interest rates by a point and a half already, and has indicated a willingness to do more if needed, but probably not until its mid-May meeting. Additionally, politics notwithstanding, the President and Congress will come to some sort of compromise on tax cuts. A combination, including some short-term quick-fixes, which the Democrats seem to desire, along with some long-term enterprising medicine which the Republicans seem usually to prescribe, appears likely. In any event, as I said last month, the combination of lower interest rates and lower tax rates have always been powerful medicine for both the economy and the stock market. There is no reason to rewrite the rule book now. As I've already admitted and proved, I have no way of foretelling the exact moment of a turn in this market. However, decades of experience tells me that six months to a year from now, we will probably look back at this time of "irrational pessimism" and say, "We should have known that things were bound to get better."
As always, the best way to protect yourself from the pessimism, the market volatility and the "gloom and doomers" is to check with a full service financial professional, and make sure that any position you hold is consistent with your ability and willingness to take risk.
(Tom Butenhoff is a First Vice President with J. E. Liss and Company, Inc.
in Milwaukee. The views are his, and not necessarily those of Liss
Financial Services or the Job Connection/Hiring
Network.)