Money outlook 2002: Hello opportunity!

We’ve just ended a year that no one will mourn. 2001 was an ugly time by any standards.
    
It was the year of September 11th, a tragic date that will become a rallying point for the Western world in the same way as December 7th did 60 years ago.
    
It was the year when the longest running economic boom of the post-World War II era officially
came to an end.
    
It was a year of huge stock market losses, unprecedented interest rate cuts, massive lay-offs, the
near-destruction of the airline industry, giant bankruptcies, plunging government revenues that
threaten new deficits, and many other bad things.
    
Good riddance.

Bond market predictions    
But before we bid a final, not-so-fond farewell, let me flash back to a column I wrote exactly one year ago.
    
In it, I warned that 2001 would be a difficult year for stock markets and advised against taking an
aggressive investment stance. I predicted we would likely see interest rate cuts that would benefit the bond market, and suggeed that as a focus for investing attention.
    
Specifically, I advised concentrating on mid-term bonds and also recommended several bond funds for those who prefer that route.

As well, I suggested selling TD Real Return Bond Fund, which had performed well for those who invested in it, as I did not feel it would do well in the changing environment of 2001. That call turned out to be bang on the market.

Lookahead at bonds    
If you’ve been paying attention to the bond market, you’ll know that mid-term bonds did very well in 2001.

However, looking ahead, it appears the rate-cutting cycle is just about over and long bond yields are already edging up.

Therefore, don’t expect bonds to do anywhere near as well in 2002. Avoid long-term issues especially, and the mutual funds that specialize in them. 
    
Next page: Stock market recovery

Stock market recovery
Looking at the stock market, unless there are more unexpected shocks lurking out there, it should
be much better time for investors. I expect there will be some bumps along the way.
    
The recovery may be slower taking hold than many people expect as the economy continues to
digest the big lay-offs of 2001. As well, the U.S. government may fall back into deficit as it tries to cope with the big Bush tax cuts, an economic stimulus package, declining revenues, and the cost of the war on terrorism.
    
But we should see clear signs of a turnaround by the third quarter at latest. That will bring with it
an end to interest rate cuts. That should add momentum to the stock market rally that began in
October.

Volatility and buying    
Until there are clear signs the recovery is underway, I expect to see continued volatility in the
stock markets with investors reacting to day-to-day events as they have been for the past several
months. That will likely mean some corrections along the way, perhaps big ones.

Treat them as buying opportunities.
    
We’re at the point where it’s time to come out of the shell. Billions of dollars are still sitting on
the sidelines in money market funds.

The yields on those funds is now extremely low, and may be approaching zero in funds with high management expense ratios. So cash held there is unproductive. You might as well have it in a savings account.

Deploying your assets   
I recommend a gradual redeployment of these assets. Don’t commit everything at once.

Rather:

  • Make a plan
  • Decide what securities you want to hold
  • Set a target entry price
  • Wait for the right opportunity.

It will likely come. And if it doesn’t, another one will.
    
Place a little less emphasis on value and a little more on growth in your selection of stocks and equity mutual funds. That’s where the greatest profit potential will lie as the recovery takes hold.

Adapted from a column that originally appeared in The MoneyLetter, published by MPL
Communications. For subscription information call 1-800-804-8846.