by Archie M. Richards, Jr., CFP^®
March 15, 2004

On Monday, March 8, the Dow fell 66 points. Tuesday, down 73, Wednesday, down a whopping 160. On Thursday, the day of the horrible terrorist attacks in Spain, down yet another 169 points. Altogether, the Dow fell 5.7 percent from its top last January. The pessimism has gotten pretty thick.

No one can be certain why. Reporters offer reasons for stock prices moving in a certain way. But they can't poll millions of American investors to find out why they're buying or selling. There are too many people to ask. The reporters just have to guess.

Here are some of the reasons commentators have supplied to explain the recent selling. I advise you to disregard all these reasons. Don't participate in the selling.

Terrorism: Terrorism will take several years to defeat. It's an agony, of course, if it affects you or your loved ones directly. But those murderers won't kill many westerners and certainly won't destroy the fabric of modern civilization. On the contrary, Afghanistan and Iraq are joining the modern world. Iran, whose governing clerics are despised by the people, will follow suit. Libya, once a leading terrorist nation, has joined the pretty good guys. Eventually, the terrorist holdouts will give up. No one wants to die for nothing.

Fourth Anniversary of the Nasdaq's Peak at 5000: This is a ridiculous reason to justify falling prices! The market couldn't care less about the past. People buy and sell stocks because of what they expect in the future.

Low Employment Number: The government recently reported that Americans in February 2004 gained only 21,000 jobs. Nonsense! The number is too low. In any month, the government first reports employment numbers for large corporations. Small companies are too numerous to account for in a short time. Yet the biggest employment growth occurs in small companies. That employment number will be revised upward.

Interest Rates are Expected to Rise: The great majority of investment gurus expect interest rates to rise from current levels. The Federal Reserve, they note, is creating money quite rapidly. They believe this will generate higher rates of inflation. When prices rise, creditors always require higher interest rates, making the buying power of the money they receive back from borrowers equal to that of the money they lent out.

Higher inflation and higher interest rates are what the experts anticipate. But time and time again, the predictions of the majority of experts about major economic trends turn out to be wrong. I prefer to join the minority. I expect inflation and interest rates in the long run to continue down. Both have been falling for the last 24 years and will continue down for many years to come. Here's why:

• Government policies have improved and will continue doing so. Oh, current economic policies are still bad enough, but they're far better than those of Lyndon Johnson and Richard Nixon. As the policies become less damaging, production increases. This causes inflation and interest rates to go down and stock prices to go up.

• Amazing technological advances have also fueled production increases. Even though the supply of money has risen, the quantity of goods and services have kept pace, causing inflation to diminish. With inflation down, interest rates have fallen as well.

I've been surprised and pleased at how quickly investors have developed feelings of pessimism. There are lots of bears out there. (A "bear" is a person who observes that stock prices have fallen and expects them to continue falling.)

The more bearish investors feel, the greater the chances that prices will rise. Most people do not sell because they've become bearish. On the contrary, they become bearish because prices have fallen. Sentiment doesn't lead stock prices; it parallels them. Pessimism is greatest when prices are lowest. Intense pessimism means higher prices ahead.

Bearishness lies just below the surface. This means the bull market is still intact. Forget about short-term price declines. Just keep hanging on through thick and thin.