Economy's strength offers investors hope
7:14 PM 7/22/02

indent Over short periods, the stock market and the economy can become disconnected. But over the long term, the market and the economy follow like courses.
indentThat bit of wisdom is worth remembering in these trying times for investors because the stock market, in a frightening tailspin, has become disconnected from the economy, which sputtered a bit but is still cruising at a comfortable altitude.
indentThe stock market's fall continued Monday with the Dow Jones average of industrial stocks dropping 235 points, or nearly 3 percent. The Dow has now dropped 625 points in its last two trading days.
indentEven before the collapse of the past two days, investors were spooked. As of last Wednesday, they had pulled $11 billion out of stock mutual funds during the previous week.
indentIt's easy to see why investors are nervous. Consider the fear that the solid company you own today could be hit by an accounting fraud crisis tomorrow, reducing the value of your investment to almost nothing. Enron, Global Crossing and WorldCom, all once high-flying corporate success stories, are in bankruptcy proceedings, with accusations of accounting fraud rampant.
indentConsider also that when Federal Reserve Chairman Alan Greenspan warned of "irrational exuberance" in the stock market, he was right. In the late 1990s investor expectations for several high-technology industries, like telecommunications, were wildly optimistic. When reality set in, stock prices deflated. Tellabs was over $70 a share in 2000. It's under $6 today. Ciena was over $140 a share in 2000. It's under $5 today. Those losses are enough to scare anybody.
indentThe market's losses are also enough to create the impression that the nation's economy is falling apart - and that investors' best bet is to fold their portfolios.
indentBut the economy is not falling apart. Far from it.
indentThe gross domestic product, the value of the nation's goods and services, rose at a robust annual rate of 6.1 percent in the first quarter of the year, after rising at a modest 1.7 percent annual rate in the fourth quarter of 2001.
indentPayroll employment was up in May and again in June, after falling from January through April.
indentInflation remains in check, with the Consumer Price Index up just 0.1 percent in June. The unemployment rate was 5.9 percent in June, up slightly from 5.8 percent in May but down from 6 percent in April.
indentEven corporate revenues are beginning to surpass lowered expectations. Of more than 200 corporations that have reported revenues from the past quarter, 51 percent were ahead of expectations while just 23 percent came in below expectations.
indentTo be sure, reasons to worry about the economy remain. Corporations have been guarded in forecasts for sales and earnings, citing sluggishness in their markets. The federal budget deficit is on the loose again, suggesting there may be pressure to raise interest rates. And the stock market debacle will have its own effect, shrinking the value of investments in the economy.
indentBut there are also reasons for optimism. The slumping value of the dollar, for example, should eventually boost sales of U.S. goods abroad as they become cheaper for foreign buyers.
indentInvestors must make decisions based on their personal circumstances. But for those who can look long term, the evidence suggests that the U.S. economy is in relatively good shape, with good prospects. Eventually the stock market will reconnect with the economy, and confidence in America will be rewarded.