The Economy and the Markets
by Fritz Feuerherm, Vice President and Chief Investment Strategist
Advantus Capital Management, Inc.

"The tragic terrorist events of September 11 may be the most significant economic, political and social events of our lifetime. It will take a long period of time to restore confidence and enable investors to rationally price risk in the capital markets ..."

The Economy
We published the sentences above in an article we wrote shortly after the terrorist attacks nearly 10 months ago. We believe — and see supporting evidence — that the events of September 11 continue to press hard on the economy and particularly hard on the stock market.

A tenuous, fundamental global recovery is in play. However, as the U.S. very slowly shows signs of recovery (e.g., first quarter GDP revised upward, businesses rebuilding inventories, consumers continuing to spend, etc.), the equity market still appears skeptical.

The Markets
Because there is more systematic risk in the market today, investors demand a higher premium when taking on risk. Risk has always been an important consideration for investors, and over the past year, we've dealt with some unusual risks that have, unfortunately, become mainstream:

Threats of terrorism, whether real or perceived, are occurring more and more frequently throughout the world.

Fraudulent accounting practices, self-absorbed corporate management, and asleep-at-the-switch boards of directors as we've seen evolve at Enron and Tyco, make corporate America look like a house of cards — ready to topple with the next news report. Some management teams lost sight that value to shareholders comes before their self-interest, and some boards of directors were not diligent caretakers of shareholders' interests.

Investors want more assurance that stocks won't fall prey to unpredictable events, questionable earnings reports or unscrupulous corporate leadership. With each negative surprise, investor confidence weakens. This is a lot of weight for the market to carry, and investors are not yet confident that the market can bear the load.

It's been an unusual quarter. In the second quarter, ended June 30, we recorded very strong fixed income performance (Lehman Aggregate Bond Index: 3.69%) and very weak equity performance (S&P 500 Index: -7.81%). The difference in returns between stocks and bonds, as measured by these two benchmark indices, is near record levels. We've seen a major rally in the bond market, and a major sell off in stocks. A flight to quality is still underway, and this is not unusual when political, social and economic events hold uncertainty. The Federal Reserve made no change to the monetary policy during the quarter, and the contained interest rates keep yields attractive to investors.

Outlook
We feel the economy is growing, albeit slowly. We expect that U.S. growth, as measured by GDP, will be a respectable 2.5 percent both for the quarter and full year, 2002. Monetary policy is still easy, and we expect no changes in the near term. Inflation is running less than two percent annually and we expect little if any increase.

Our economy relies on three sectors: business, federal and municipal government, and consumers.

We believe businesses are still wary of capital spending, so they're holding on to their money, which doesn't help the overall economy. In our opinion, it seems unlikely that businesses will significantly increase capital spending soon.

The war on terrorism will be long and expensive. We believe that federal tax stimulus packages are done. State and municipal governments are starting to run deficits, which may lead to tax increases.

The American consumer has supported our sagging economy for nearly two years. Housing starts, auto sales and other goods are still relatively strong. We believe consumer spending will continue to shore up this economy, albeit at a slower rate.

We believe the capital markets will continue to be volatile and investors may see lower rates of return across all asset classes. The weakness of the dollar may benefit investors considering a greater allocation to international investments. Consider having a periodic conversation with your financial advisor about your goals, risk tolerance and allocation strategy.

Diversification and discipline are mainstays for serious investors. Diversification is of paramount importance to all investors, and the current investment environment drives that point home. We also strongly urge you to stay in the markets for the long term. Study after study shows that investors who consistently stay in the market are eventually rewarded for their discipline. Markets go up and markets go down; it's their nature. By focusing on your strategy and resolve, you're much more likely to reach your financial goals.

The Lehman Brothers Aggregate Bond Index is a market-weighted index that covers the U.S. investment grade fixed rate bond market.

The index includes government and corporate securities, agency mortgage pass-through securities and asset-backed securities.

The S&P 500 Index is a broad, unmanaged index of 500 common stocks which are representative of the U.S. stock market overall.

The Economy and the Markets has been prepared for informational purposes only and is the opinion of Advantus Capital Management, Inc. Past performance is not indicative of future results.

This information is provided courtesy of Advantus Capital Management, Inc., a Registered Investment Advisor.

Securities offered through Securian Financial Services, Inc., Securities Dealer, Member FINRA/SIPC, is affiliated with Advantus Capital Management, Inc. and Minnesota Life, 400 Robert Street North, Saint Paul, MN 55101, 1-888-237-1838.

©2002 Advantus Capital Management. All rights reserved.
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400 Robert Street North
St. Paul, MN 55101-2098
1.888.237.1838