We are the World
Jan. 8, 2001

Sylvia reluctantly turned to the financial pages. The news was unremittingly bad these days -- weak consumer spending, layoffs by dot-coms and Old Economy types alike, a faltering stock market. Even the delirious fervor unleashed by the Fed's cut of 0.5 percentage points in the federal funds rate proved to be ephemeral as investors came to the gnawing realization that the economy's travails appeared to be deeper than earlier imagined.

Sylvia's portfolio had not escaped the tremors in the financial markets in 2000. With the S&P500 down over 9 percent, and the Nasdaq down a withering 39 percent, there were few domestic equity funds that escaped unscathed last year. Funds devoted to technology stocks paid the steepest price: after skyrocketing in 1998 and 1999, most meekly surrendered their gains in 2000. But the broader market suffered as well as investors, increasingly concerned about slowing profits, drove stock prices down at the faintest whiff of unmet expectations.

Diversification had helped, noted Sylvia, to staunch the bleeding. If ever there was a year in which bonds, money market funds, even the lowly CDs, acquired an attractive hue, 2000 was it. For, the gains garnered by such conservative investments in one's portfolio helped offset the havoc wrought by the equity investments.

The carnage in equities was not confined, noted Sylvia, to the U.S. market. A glance at the performance of stock markets around the world revealed a similar tale of woe. After a robust beginning in 2000, most global markets declined, with the technology sector leading the rout. By year's end, Japan 's Nikkei was down a staggering 27%, UK 's FTSE100 was down 10%, Germany 's DAX was down 7.5%. France 's CAC-40 emerged barely unchanged -- it was down 0.5% -- while our neighbor to the north, Canada , quietly gained 6%.

Asia's emerging markets felt the pain: Singapore fell 22%, Hong Kong fell 11%, South Korea plunged 51%. China bucked the trend, with the Shanghai A share index rising an astonishing 51%.

The misery continued in Latin America . Argentina fell 24%, Brazil shed 17%, Mexico was off 22%.

So what, wondered Sylvia, did 2001 have in store for the distraught investor? More of the same -- or a return to stock market gains?

It depended in large part, decided Sylvia, on the performance of the U.S. economy. If the domestic economy strengthened (the Fed's recent rate cut was intended to spur economic activity), corporate profits would rebound, leading, in all likelihood, to rising stock prices. Furthermore, if the U.S. economy picked up steam, it would spur economic activity elsewhere as other countries would find their export picture considerably brightened.

A protracted slowdown in the U.S. economy, on the other hand, could have deleterious effects around the world. Sylvia, resolutely turning aside from the unpleasant prospect, moved on to the comics pages. They were now in color, she noted.

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