The Federal Reserve has reversed its tightening stance and on January 3, 2001, surprised the markets with an inter-Federal Open Market Committee (FOMC) meeting rate cut of ½% in Federal Funds and ¼% in the Discount rate. After this cut the stock market averages have all declined after their initial increase. Some stocks, however, have remained strong and appear to be making bases from their sharp declines.

The other stock market averages that most investors follow, the Dow Jones Industrials and the S&P 500, experienced more "normal" down years. The S&P was down 10% for the year and only 13% off its highs. The Dow finished the year down just 6% and only 9% off its highs. This is much easier for investors to tolerate as compared to the enormous price volatility in the NASDAQ. It is reasonable for the Dow and S&P to recover from these declines. The NASDAQ, however, due to its volatility, has a much more difficult wall to climb.

2001 Outlook

In general you should expect more volatility for 2001 than last year. That does not mean the NASDAQ will be down another 40% this year. The price swings should just continue to be large, especially if the economic recovery is swift. The other alternative is for the NASDAQ to just grind down to a halt, with little or no activity or volatility. I do not expect that to happen.

By the end of 2001, we expect the NASDAQ to be up anywhere between 6% and 50%, the S&P 500 to be up anywhere between 4% and 20% and the Dow Jones Industrials to be up anywhere between unchanged and +15%. It is key to remember that in a defined contribution plan, such as your 401(k), you are in a long-term race! You will be accumulating investments on a monthly basis for many more years. It is to your advantage to be accumulating lower-priced units. These dips in the market are normal and are expected over time. Remember to remain true to your long-term investment strategy. Avoid focusing on short-term market fluctuations. Keep your perspective of accumulating lower-priced units at these downturns. It’s a long race.