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Time to rebuild your portfolio

Investors fled to bonds and money markets as the market crumbled. But some analysts say those with long-range goals best stay put.

By Guy Halverson Staff writer of The Christian Science Monitor / April 9, 2001



NEW YORK

As small investors thread their way through the rubble of the US stock market, signs of rebirth and reconstruction are starting to appear.

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Stock prices of many companies, analysts say, are more in line with their earnings. "The market is becoming fairly valued," says Richard DeKaser, senior vice president and chief economist with financial firm National City Corporation in Cleveland, adding that it may be time to start buying some selective issues.

The interest-rate easing by the Federal Reserve is now "beginning to work its way through the economic system," Mr. DeKaser maintains. A rush to refinance mortgages at lower interest rates is freeing up additional cash for consumer purchases or investments, he notes. And finally, "the huge inventory correction of the past few months" - that is, the buildup of merchandise on display floors and in stock rooms - is starting to abate, which frees up debt loads and expenses for scores of US businesses.

The recovery will be "more muted" than he had thought likely some time back, says DeKaser, but it still should be enough to prevent a recession. And enough to start a market upswing.

At the very least, the US economy should resume growth by the fourth quarter of 2001, says David Wyss, chief economist with Standard & Poor's Corp. in New York. Mr. Wyss believes that a tax cut - which he now sees as likely - should help boost economic growth. Some analysts differ. A report last week from the respected Anderson School at the University of California, Los Angeles, cited a 90 percent likelihood of recession this year, although it expects it would be short-lived.

Most investors, battered by recent market volatility, will happily accept any glimmers of good news at this juncture. For smaller investors, after all, the overarching issues, as the market headed southward during the past year, have been twofold:

1. How to protect existing financial assets, especially those linked to the stock market.

2. How to ensure that assets are well-positioned to take advantage of the eventual shoring up within the market.

Banking on an (eventual) upswing

Having a reconstruction plan is clearly necessary, given the sharp losses of the first quarter of 2001, which ended March 31. As the accompanying tables show, virtually all major mutual-fund sectors took a nasty drubbing.

Science and technology funds led the downward parade, followed by health and biotechnology issues, according to Lipper, Inc. But virtually all other types of mutual funds were also clobbered, especially anything with the word "growth" in it.

A rebound for value

The only bright spot among equities were small-cap value stocks, which eked out a minuscule gain. And real estate investment trusts, REIT funds, held their losses to under 2 percent.

The average diversified US equity fund lost about 13 percent for the quarter.

Diversification in international funds didn't help much. They too were down. To really have posted gains during the quarter, an investor had to be in "bear-market" funds - funds that employ exotic hedging strategies, including techniques to "short the market" - that is, to profit from downward gyrations.