A Time for Patience by Roger B. Palley, CFA Market Commentary, Sept. 24, 1998.

NEWPORT BEACH, Calif.--(BUSINESS WIRE)--Sept. 24, 1998-- Just when you thought it was safe to go into the market, the third quarter of 1998 is tossing investors around with impunity. Recent volatility has come as quite a surprise to anyone whose experience as an equity investor began in the last 3 1/2 years, and a shock to the system for those who put money into stocks during the second quarter.

Let us first say that we do not believe this is the beginning of a secular bear market. Some air has been let out of the balloon and the market will likely test and re-test the current lows. We've all been a bit desensitized by this unprecedented, continuous market advance and would do well to realign our expectations. We need to remember that stocks normally go up and down.

Investors can take heart in the fact that the U.S. economy continues to grow, consumer confidence is high, unemployment is at a historical low, interest rates continue to trend lower and corporate profits remain solid.

So, what happened to our stock market?

Never before have the world's economies been more closely aligned. Although the United States is a dominant economic force, we are not immune to world events. The domino effect placing many of the world's economies in financial peril has touched our markets and our stock market reflected this by dropping 19% from its highs. Still, there remain vast differences between these weakened economies and our own.

Many of the Asian economies have over-produced, over-built and are over-leveraged. Some Latin American financial markets have become weakened by depressed commodity prices -- a large part of their exports. Russia's financial system has collapsed. Contrary to these countries, the U.S. is on sound financial footing. The government is running a surplus for the first time in decades, presided over by a Fed chairman dedicated to moderate growth and low inflation.

International investors reallocated funds to safer shores, crippling some foreign currencies and strengthening the U.S. dollar which was used to buy domestic stocks and bonds. Historically, the average foreign inflows into U.S. stocks was $7 billion per quarter. In the first quarter of 1998, that amount ballooned to over $30 billion.

Perceptions of risk and expectations of corporate earnings drive the stock market. One factor that brought about the recent adjustment to our stock market is the anticipation of slowing growth in corporate profitability. Market volatility has increased due to uncertainty around the world and the perception that our financial markets are tied to these regions. This recent market sell-off was exacerbated by the recent devaluation of the Russian ruble and the resultant 90-day moratorium of Russia's foreign debt payments.

There are few (if any) tangible signs of a U.S. recession. GDP is still anticipated to grow moderately. Wall Street analysts are projecting slightly higher corporate earnings for 1999. The United States remains the most efficient economy in the world with the highest productivity. Interest rates are trending flat to down and we have never had a sustained bear market in a declining interest rate environment. For these reasons and more many have confidence in the U.S. stock market.

The market's roller coaster ride has left many unsettled and wondering what to do. This is a time for patience. The chart below demonstrates how "hanging in there" has paid off for investors in years past.

This decline will allow the process toward larger capitalization, higher quality stocks, primarily in the food, telecommunications, utility and financial service industries. In these uncertain times, investors must realign their expectations and, of course, have patience.

A chart of "The Rebounding Performance History of the S&P 500" is available by contacting Sharon Richardson at Palley-Needelman Asset Management 949/760-6644, or [e-mail].

Roger B. Palley is President and CIO of Palley-Needelman Asset Management in Newport Beach, Calif. With over $4 billion in assets under management, Palley-Needelman (www.pnam.com) is Orange County, Calif.'s largest independent investment advisor. (949/760-6644)