Monthly Commentaries

Is it really different this time? – September, 2004

The month of September saw most major equity markets up slightly. This improvement occurred despite a 40% increase in companies warning of lower quarterly earnings results (relative to last year). For some market watchers these warnings just confirmed their bearish views of the markets. Others were surprised by the market’s resiliency. Newspapers and commentators all argue that an economic calamity is a near certainty. But will economic growth be different this time? Economic & political conditions make it seem like the U.S. economy is in a tenuous position. However, we believe the U.S. economy will continue to grow rather than fall precipitously. As you know, Gross Domestic Product (GDP) is the total value of a nation's output produced within the country's physical borders. A significant portion of GDP accrues to equity investors through growing corporate profits (although not equally to all companies). It is this GDP growth that provides a significant tail wind for equity investors. What is surprising is how consistent this tailwind has been. If you think about the last 60 years, there have been many scary events: the Korean War, the Cuban missile crisis, doing away with the gold standard, allowing currencies to float freely, the energy crisis, stock market crashes and the failures of banks, brokers and major corporations. Throughout this

period, there has been many times where market commentators were arguing that the economy would fall off a cliff. Well it didn't. In fact, U.S. GDP growth has been remarkably steady at 3% per year with boundaries of +/- 3%. On very few occasions did U.S. GDP growth pierce either boundary? This year the economy will see a GDP growth rate of about 3.5%, right in line with historic trends. Many believe that events like those listed above don't count because this time it is different. However, we caution that in each case market commentators argued identical positions. What was the same in each case was the resiliency of the

economy. We expect that the economy will continue to grow and that growth will translate into increased profits for many different corporations. To expect otherwise is to assume that this time it is different. Arthur Heinmaa, CFA Managing Partner