Commentary: Educated Investor - Keep some powder dry

Worldwide events occur every day that may or may not have a lasting effect on our stock and bond market valuations.

It is important to recognize which occurrences will give rise to long-term reactions and those that are only a knee-jerk or short- term and emotional responses. In other words, it is imperative as an investor to separate the wheat from the chaff when it comes to determining the effect of various events.

On the day that Spain was hit by terrorists, a friend of mine suggested that was the reason the stock market was tanking that day. The Dow Jones Industrial Average went on to lose 168 points or 1.6 percent for the trading session.

Sure enough, the following day the Wall Street Journal joined my friend's assessment by stating in the Money & Investing section that, Stocks Decline on Terrorist Report.

Now no doubt the stock market probably was responding to the bloody and senseless act of a few terrorists, but keep in mind that was an emotional or knee-jerk reaction. Random terrorist attacks that are spread out over time do not have any lasting effect on our stock markets.

As a matter of fact, the Dow Industrial regained 111 points the very next day.

When it comes to investing you need to look at the long-term. You need to recognize events that can have significant long-term effects on our economy and that could send our equity markets into either a prolonged bear or bull market. You don't want to be jumping in and out of the market for purely emotional reasons.

Sure the market lost 168 points on that horrible day in Madrid. But then again the market has been falling since the middle of February. Actually, the Dow had just lost 166 points or 1.53 percent just 20 hours prior to the attack. Did the market know that there was going to be an attack? I seriously doubt it.

Financial markets rise and fall on underlying economic stimulus. If you want to worry about why the market has been drifting off lately, don't blame the hideous terror attack but instead look at the shape of our current and predicted economy or, maybe that the market has gotten too far ahead of itself.

February's employment figures grew by a meager 21,000 jobs. Economists had been looking for a 100,000-plus number. And to add insult to injury 21,000 individuals found work with the U.S. government.

This increase in government employment means our deficit will grow even more since the government doesn't generate revenues. Only taxes and fees will pay for their employment increases.

Sadly the private sector didn't add to the employment growth as they only broke even for the month. Not a pretty picture for our economy.

Then we also have to contend with the growing trade deficit. One would think with a weak dollar we could stymie this rising import trend. But we aren't which only makes the negative deficit figure even scarier.

Last year our trade deficit hit a record $541.8 billion; that was a 12.7 percent increase even with the weak dollar. I would hate to think what our deficits would have been if the dollar had been stronger.

If I really want to observe some international behavior that could cause our markets some real long-term damage, I would focus on Japan and China.

Right now Japan is helping our housing industry. You see Japan has been buying our treasuries in order to try and stabilize the dollar against their yen.

As a matter of fact, they are on target to purchase more treasuries in the first quarter of 2004 than they purchased during all of last year. That's one of the reasons we continue to see historically low mortgage rates.

If they quit buying, watch out. Dump your housing stocks, and watch interest rates rise. A rise in interest rates would place an enormous burden on our slowly recovering economy.

On the other hand, China has been consuming raw materials and steel like wild fire. Since we have become a global economy I believe China, because of its population mass, could trigger inflation here at home even though our economy is only recovering moderately. Inflation can cause misery for the individual and ultimately our financial markets.

So the bottom line is this: Don't base your investment decisions on emotional issues. Such issues only tend to affect the market in the short term. Try to ignore the daily headlines of the financial media. Buy and sell on basic economic fundamentals that could have a prolonged effect on our market valuations.

Also look for the unsuspected. Rarely do markets rise or fall on the obvious. Usually we get blindsided. China could be a major threat to the future of our economy in more ways than one.

As for your investment portfolio, I would be cautious and at the same time liquidate any weak positions you may have in your portfolio. I would reinvest those dollars in a money market and wait for clearer days. In other words, keep some powder dry for better opportunities.

David R. Clogg, ChFC is an account executive at Chapin, Davis. He can be reached at 410-435-3200 or visit his Web site at www.theeducatedinvestor.info.

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