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No, we are not happy with our 2000 performance. But before we get to the missteps, here’s a quick look at what we got right: We correctly predicted the demise of the Internet startups: “the bust will inevitably follow. We expect fully 80% of today’s high-flyers to fall by the wayside.” [BCN Advantage 1999 Annual Report.] We successfully avoided much of the March-April decline. Where possible, we positioned our clients in mid-cap stocks, one of the year’s best performing groups. This limited the downside and demonstrates that fund selection (not just market timing) is a major component of the BCN service. We moved fully into the market following the March-April decline, taking advantage of the climb back to Nasdaq 4200 that ended in late August. But… missing the September exit signal more than offset the gains from the first 8 months of the year. Mistake #1: Thinking our key market indicators had been distorted by the uncertainty surrounding the presidential election. Markets hate uncertainty and the outcome of this presidential race was the most uncertain in our nation’s history. But the noise from the election should have been dismissed, not our key indicators. Mistake #2: Thinking the market’s March-April decline had already priced in the 1/2-point Fed hike of May 16th. The market does not do a good job of anticipating (and pricing in) Federal Reserve interest rate moves. Instead the market tends to react to Fed moves after the fact. The best evidence was the market action leading up to the Jan 3rd rate cut. The closely watched Fed futures precisely predicted that (1) the Fed would cut; (2) the Fed would cut ½ point (rather than the ¼ point many analysts expected); and (3) the Fed would cut between scheduled meetings (rather than waiting for the next FOMC meeting on Jan 31st). Despite being right on all counts, the market continued to sell off heavily right up to the Fed’s “surprise” move. For the record, this is more than just hindsight – these are invaluable lessons for the future. Don’t Fight the Fed. Sure, we know that… but what does this mean when it comes to your money? The first half of the equation is straightforward: when the Fed CUTS rates, it’s time to move fully into the market. The Fed almost always cuts interest rates when economic conditions are at their worst. Though it often takes more than one rate cut to fully reverse the market’s decline, waiting for an absolute bottom is rarely worthwhile. Remember the market’s dramatic reversal after the Fed cut rates in October 1998, in the face of the international currency crisis? We didn’t wait. We moved our clients back into the market and remained fully invested through most of 1999, a record setting year. Okay, so what steps should we take when the Fed RAISES rates? Our analysis shows that it’s almost always a mistake to move instantly to cash when the Fed begins a series of interest rate hikes. The Fed raises rates when it perceives “unsustainable growth”: the economy is overheated and growing too fast. In other words, the Fed begins to raise interest rates at precisely the moment when economic conditions are at their best. Historically, interest rate hikes take six months to sink their teeth into corporate earnings and precipitate a market decline. So… when the Fed begins a series of interest rate hikes, it’s important to remain in the market until the first clear sign of trouble. Our job is to spot the warning signs. If we miss a signal or misread our indicators, we know from long experience that the worst reaction is to sell into the decline. Our job is to get our clients out BEFORE the market heads south, not after the damage is done. Downturns become a BUYING opportunity, and not a time for panic selling.