Focus on Personal Finance
Economic Recovery Just Ahead?
How you can benefit if the economy turns around in 2002.

After a growler of a bear market, the likes of which we haven't seen since 1973-74, are we finally in for an economic turnaround? In this month's column, we'll assess the likelihood of an economic recovery occurring this year and exactly what this can mean to you as a high-earning ophthalmologist.

We already have ample evidence that we experienced the worst of the slowdown in the second half of 2001 and we're now on the road to recovery. No one really knows exactly where recession ends and recovery begins, but look at the facts: Unemployment claims are rising at a lower level than previously anticipated; new home sales are once again on the rise; orders for big-ticket items have posted gains; and there's been a spurt in consumer confidence figures after 3 straight months of decline.

Also, we've been in a recession since at least March 2001. Historically, recessions last an average of 16 months. So most of the damage may be behind us.

WHAT ELSE IS ON OUR SIDE?

We're now seeing a convergence of several positive factors. Eleven interest rate cuts in 2001, an economic recovery tax package in mid-2001, an economic stimulus bill around the corner as a result of the Sept. 11 tragedy, shrinking business inventories, and increasing new loan demand as a result of rate cuts.

Couple these factors with back-to-back declining years in the stock market in 2000 and 2001. We haven't seen 3 consecutive declining years since the early 1930s.

Prior to Sept. 11, we fully expected an economic recovery in the first half of 2002. However, the deep recession, greatly exacerbated by the terrorist attacks, set back our timetable. We now expect the economy to stage a recovery sometime in the latter half of 2002. And the stock market usually perks up about 6 to 9 months ahead of the economy.

With low interest rates already boosting loan demand and consumer confidence bolstered by Congressional stimulus to the economy, the stage is set for a recovery. The lower interest rates should fuel further investment, especially in technology, and this bodes well for the general economy.

HOW YOU CAN CAPITALIZE

If recovery is around the corner, how can you take advantage of the stronger economy we expect later this year?

In your own practice, expect to see more elective spending by patients, particularly in such areas as refractive surgery and in your optical business.

In stocks, invest in areas that have proven themselves in the past. Financials and retailers are traditional leaders of an economy coming out of a recession. Financials should do well because of the lower interest rates, and retailers should prosper because consumers, showing renewed confidence, will have pent-up demand for clothes and other goods. With borrowing costs down and business inventories at low levels, we should see upticks in consumer staples, manufacturing, basic materials, technology and health care.

PROCEED WITH CAUTION

In the last quarter of 2001, the stock market staged a fairly impressive rally, partly based on low stock valuations immediately following Sept. 11, and partly because of an anticipated recovery. This recent market advance has brought stock valuations back to fairly lofty levels, and this should temper your enthusiasm somewhat.

Don't expect the 20% annual returns of most of the 1990s. Instead, expect the stock market to provide long-term total annual returns of about 10%, just about what it has delivered since 1926. After being bear market survivors, we'll take those returns any day.

Also, have a healthy measure of the S&P 500 in your portfolio over the next 10 years. As a proxy for the S&P index, you can buy SPY, traded on the American Exchange.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Steven A. Estrin, MBA, are president and chairman, respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group (phone: 713-627-7660) provides personalized fee-only financial planning, investment management and business consulting services.