Think You've Missed the Market Upturn?

What's a poor soul to do?After throwing in thetowel and conceding thatthe stock market would never changedirection and head higher, you finallycapitulated and bought yourselfbonds and/or annuities in the firstquarter. At the very moment inMarch that 84% of those polled byMarket Vane were bullish on bonds,we warned you that number wastrumpeting a change of directiontoward the stock market.

HELPFUL BULLISH MANTRA

At the risk of sounding like abroken record, I'll repeat the samemantra over and over because it'sthe best advice I can offer physician-investors. If you've lost a bundlein the past 3 years, you won'trestore your nest egg owning bondsor buying annuities.

After 3 years of occasional,short-lived rallies in a bear market,many people remain afraid. They'vewatched from the sidelines as theDow bounced from 7500 to over9000 in a matter of weeks. Theydon't want to chase stocks. Theyjust don't know if the economy hasturned or not, and they fear thatmany stocks are no longer bargains.Do not wait for a consensus to prevailbefore you take action.

MIXED ECONOMY SIGNALS

Unemployment has reached6.1%, the highest level in a decade.In hard-hit cities like New York, therate is now over 8%. The third collegegraduating class of the past 3years is now backed up on the previous2 looking for jobs. More andmore grads are coming home to livewith their parents because theycan't get started in the workplace.

During economic contractions,companies downsize. They fireworkers and close plants. They trimunprofitable product lines andreduce inventories. Worker productivityrises when fewer employeesare willing to work harder to producethe same output becausethey're glad they still have a job.Rising unemployment is a negative,but rising productivity is a plus forthe future of the economy.

CONSUMER CONFIDENCE

If you pay any attention to thefinancial newscasts, you know thatseveral different groups track consumersentiment. The University ofMichigan and the ConferenceBoard are the 2 most widely disseminatedseries of data, and bothare showing dramatic improvementfrom their dismal levels just beforethe start of the war in Iraq.

These numbers tend to impactretail sales, auto sales, and consumerwillingness to undertake largerexpenditures (eg, vacation traveland home improvement projects).Sales of new homes have reflectedthis factor, remaining strong withthe continued low interest rates.

VALUATING THE BOTTOM

When the stock market changesits direction and heads higher, thebiggest uncertainty surrounds forwardprojections of earnings pershare. Over the years, the stockmarket has proven itself to be oneof the better lead indicators availablefor future economic trends.While the record isn't perfect,stock prices are more reflective ofwhat is to come rather than whathas already transpired.

Three years ago, most of us didnot foresee the severe economicdownturn that dragged down thevery sectors that had been theengines for growth—technologyand telecom—even when stockprices were already heading downfor the count. Now we're on theother side of that curve.

Innovative companies with excellentgrowth prospects and expandingearnings that don't seemtied to an economic upswing areleading the indexes higher. Whenpeople comment that price/earningsmultiples are too high, I wonderhow they know. You only knowthe price of the stock now, butwhat the actual earnings will turnout to be is uncertain.

NASDAQ'S HUGE LOSS

From the highest peak to thelowest trough, the Nasdaq lost76% of its value. Remember thatthe Nasdaq peaked over 5100 anddropped below 1200 at its lowestpoint. The math of a bounce ofmore than 40% from such a lowdaily level would discourage youfrom wanting to chase stocks now.As of mid-June, the Nasdaq wasstill down about 67% from its highin March 2000. That implies thatwe have a long way for stocks to goon the recovery trail.

There are many investors whohave been frozen into inactionbecause they don't know what todo. Some funds have moved frommoney market accounts into thestock market, but the mass exodusfrom the bond market still awaitsus. Eventually lots of those fundswill flow back toward stocks.

Even so, physician-investorsshould not expect the market to gostraight up. It will need rest periodsfrom time to time to consolidate itsgains as part of its continuingrecovery process. When it is crystalclear to everybody that the economyhas turned up, rest assured thatstock prices will be much higherthan they are today.

Joan E. Lappin is the founder

and chief investment officer of

Gramercy Capital Management

in Manhattan. She will be

reappearing as a featured guest

on Wall Street Week with Fortune

on your local PBS station on Friday, July 4,

2003. Gramercy will be hosting an investment

seminar at the New York Yacht Club in

Newport, RI, in mid-July and again in

August. To reserve a place or for questions

or comments, call 212-935-6909 or e-mail

jhlappin@gramercycapital.com.