Whether you realize it or not, we have just survived the worst year in the history of the Nasdaq (the index began in 1971). The Dow 30 posted its worst year since 1981 and the S&P 500 index turned in its worst year since 1977.

The broad-based indices finished the year lower, posting greater losses than the market has seen in two decades.

Dow Jones: -6.2
S&P 500: -10.1
Nasdaq Composite: -39.1



After 1999, the Nasdaq composite index had surpassed the Dow Jones Industrial Average and the S&P 500 as the index of choice. Everyone from the Wall Street Journal to CNBC to Merrill Lynch touted the index as the new benchmark. If you chose to benchmark one of the "old indexes" then you were perceived to be behind the times. The Nasdaq has become the index to watch. In much the same fashion that the S&P 500 overtook the Dow Jones as the index of choice, now the Nasdaq represents the companies of the future.

The Nasdaq is a composite of thousands of companies, which are growing rapidly and are typically considered the "new economy" companies. In today's economy, technological innovations and the World Wide Web offer the best growth opportunities and potential to find the "new Microsoft" or the "new Dell."

From optical networking to human genomics, and Internet e-tailers, investors wanted to own companies that are changing the world. And rest assured, these companies are changing the world. New companies and young management teams threw caution to the wind and operated without regard to earnings or margins in order to win the competitive war. Who could bring out the newest product first? It didn't matter that resources were being drained. More money was constantly available to the company that used all its resources. They could always offer more shares to investors and raise more money for the next product.

And then it happened. A cog in the economic machine began to falter. Energy prices began rising. The effects trickled down through the economy. The Euro (Europe's new unified currency) soon started spiraling downward. European growth slowed. In America, the interest rate hikes from the Fed were quickly slowing the U.S. economy. The Middle East erupted in renewed turmoil and OPEC cut oil supplies. In November, the closest presidential race in a century left a country uneasy and without finality. Cash built up on the sidelines while uncertainty ruled the markets.

The perceived slowing in economic growth meant the Fed's next move would be to lower rates. Bonds became the place to invest. Stock funds saw redemptions while bond funds reaped the benefits. Bonds have been much maligned for nearly four years. The bond market returned roughly the same income as a bank passbook account (2.5 percent annually) while the stock market soared. The year 2000 however, saw the bond market rising while the stock market fell dramatically.

The Year 2001 - A Look Ahead

The earnings growth expectation for 2001 is 7 percent for S&P 500 companies. This is on the heels of 11% percent growth in 2000 and 17 percent growth in 1999. Certainly, the slowing economy is showing through in corporate earnings. Wild cards for the year's growth include 1) the Federal Reserve and its interest rate reductions, 2) consumer spending, 3) inventories, 4) credit and debt levels, and 5) worldwide economies.

The stock market appears to have shed the speculative "day-trading" frothiness. It has resumed a more normal price multiple and is poised to again move higher relative to growth. We can expect a more traditional stock market. What does that mean?

Well, for starters that means companies must earn money and protect margins. Expect unemployment to continue ticking higher as companies look to lower expenses by reducing their biggest expense item - employees.

It means companies must put expansion on hold, contract operations and save cash. Companies with high cash levels will gain market share. Management experience will be crucial to making earnings estimates in 2001.

It means companies which are losing money will be losers in the coming year.

It means less consumer spending and fewer "high-end" purchases. Consumers will watch their wallets closely.

It means that this year's market is a time to own solid companies with positive earnings and proven management teams. Beware speculation, especially in the first half of the year.

It means opportunity for those who are willing to research companies and find undervalued stocks.

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