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Monday, February 25, 2002

Today's Guest: Kim Tillotson Fleming, president, Hefren-Tillotson Inc., Downtown, www.hefren.com, kfleming@hefren.com

How likely is it that we'll have a third straight down year for the major stock indices? Although we have rarely experienced three consecutive down years in the major indices, it is a possibility. The market's current decline has corrected much of the speculative excess from the late '90s, but we are continuing to experience slow economic growth and reduced corporate earnings. In order for the markets to show meaningful growth, an improvement in both corporate sales and earnings is necessary. We are anticipating a gradual recovery in economic growth this year, providing a more positive market environment.

How likely do you think it is that we'll see double-digit increases in the major indices in the foreseeable future? When the market recovery begins, it is likely that we could see a double-digit increase in the major indices. However, with valuations remaining high relative to historical levels, our expectations for longer-term equity returns are in the single digits.

If the recession is ending, why aren't we seeing a run-up in stock prices that historically occurs after an economic trough? Concerns regarding valuations and uncertainty regarding the timing and degree of improved profitability during the next recovery are several reasons we believe the markets are not yet rallying. Although the recession has been in place for a "normal" length of time, the industrial and capital spending sectors have been affected much more than the consumer sector. Consumer spending has remained fairly resilient during the current recession. The market has experienced a high degree of rotation from sector to sector, without a clear upward trend.

What are some of your favorite picks? Safeway (SWY), Caterpillar (CAT), Jones Apparel (JNY), Capital World Growth & Income (CWGIX), American High Income Trust (AHITX).