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The author is a former director at the Philadelphia Stock Exchange. Questions may be directed to him at Today can certainly be identified as the most dangerous time in the last five years to be invested in the stock market. Never before have the equity markets been so dominated by external events on a day-to-day basis as what we are suffering through at this time. To call the investment community jittery and unsure is an understatement. The possibility of a Persian Gulf conflict remains the focus hanging over the markets. Recent concerns about another terrorist attack and a continuing sluggish economy pushed all the major stock averages down for the fourth (and possibly, as of today, a fifth) straight week. Rising tension between the United States and North Korea further weigh on sentiment, leaving all three major averages now poised to retest their October 2002 lows. Dow Jones Driving Downward After initially showing some promise, the Dow Jones industrial average is down about 5.7 percent for the year while the Nasdaq composite index is about 4 percent lower. With all the geopolitical uncertainty creating volatility, the prevailing trend for stocks is clearly negative. The weak trading volume comes only from the short-term-focused Wall Street traders who view the volatility as an opportunity. For average investors, three years of severe declines, countless scandals and skepticism about Wall Street’s motives have severely damaged their desire to own stocks. Expensive stock valuations, a weakening dollar and troubling economic fundamentals are further pushing investors away. This is clearly evidenced in the fact that equity mutual funds experienced yet another month of net outflows in January, which followed the first full year of outflows since 1988 in 2002. Pessimism Prevails Even stronger-than-expected January employment reports were ignored by analysts and investors and couldn’t help the market’s direction. The unemployment rate fell to 5.7 percent in January from 6 percent in the prior month and showed the strongest job growth since November of 2000. Such information would normally suggest that the labor market could be stabilizing and that, at the least, things aren’t getting any worse. But the data were questioned as misleading since fewer seasonal workers were hired for the holiday this year, resulting in fewer being let go in January. And, yes, 12 months into our economic recovery, jobs are still down 0.1 percent versus an average improvement of a positive 3.3 percent. At some point the pessimism becomes suffocating. Will History Repeat? However, there is some optimism present with investors and analysts that the financial markets will respond as it did to the first Gulf War in 1991, when stocks tumbled in anticipation of war but rallied sharply after the conflict began. The first part of the last script seems to be unfolding, as is the spike in key commodity prices. The cost of oil has hit a two-year high, and gold has reached its six-year high. Whether the outcome in 2003 will be the same — that is, rising stocks and lower commodity prices — remains to be seen. With the war drums beating loudly and tensions running high, it is particularly difficult to ignore the potential negative impact such developments will have on our investment portfolios. New money coming in to the market will need to be extremely cautious as to the placement, timing and allocation of those assets. Invested assets will need to weather the sea of uncertainty. Until we get some clarity or resolution to the geopolitical issues, we will continue to see the ongoging resistance to the market moving forward.

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