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It has been easy to focus on the numerous hurdles our economy has endured over the past several years and to assume that new ones will continue to manifest themselves, keeping us in the doldrums.  But, what if things started going right, or even mostly right, for the next several years?  One might argue that conditions have never been better in history for growth than they are today. 

Have you noticed that the stock market is doing consistently better in spite of the continuing dreary economic news?  One reason is that we have largely escaped the first quarter earnings cycle without a single major blowup or negative surprise; corporate earnings are coming in better than expected.  What’s more, analysts have shown no signs of cutting their second, third, or fourth quarter earnings estimates. 

These days, pretense doesn’t enter the equation when people talk about their money, their livelihood, their personal well-being or that of their families.  I’ve had many a “heart to heart” with clients and friends on just those subjects over the past several months and I’m sure you have too.  People have been scared economically and physically for what seems like a very long time.  Household budgets are tight, jobs are scarce, and people seem to be hunkered down. 

The mood on Wall Street is improving, albeit slightly.  General market improvement comes ahead of the economic reports provided by the government that substantially reflect the view that the lead-up to the war with Iraq had a significant dampening effect on the economy.  Investors seem more optimistic as they learn that many companies are reporting better-than-expected earnings.

Seemingly, the war and its commensurate uncertainties no longer hold such sway over the market.  However, that could change in a moment.  Focus has shifted to factors investors are more accustomed to addressing, like earnings.  The season when companies report their quarterly earnings is upon us.  So far, 33 companies that comprise the S&P 500 index have reported.  The next two weeks are the busiest of the season with over 300 large companies reporting their first quarter earnings.  Outside of General Electric today and Yahoo! this past Wednesday, there were no earthshaking earnings reports this week.

The proof of the negative impact of the war on the economy came this week as the government released several major historical indicators.  Both manufacturing and non-manufacturing sectors showed rather dramatic contraction, to levels not seen since October 2001.  Both business leaders and consumers alike continue to delay their investment and spending decisions in the face of the Iraqi war. 

In just a week the faint signs of optimism have succumbed to the brutal realties of war.  It is not clean and it rarely, if ever, goes according to script.  Investors are realizing that they likely allowed excessive optimism to get ahead of reality.  The war will take longer than earlier hoped. 

Stock market history can be very useful as a guide in developing portfolio strategy, but it should never be used as a precise predictor of the future.  It repeats itself, just not in the same way or at the same time.  In 1990, the S&P declined over 20% in the weeks following the invasion ofKuwaitbyIraq.  But it did not rally in 1991 until it became clear to investors that the coalition forces would be successful in turning back the Iraqi invaders.  The S&P increased by 18% in just three weeks following the market low on January 15,1991.  This time investors did not even wait for the war to start.  In the past seven days the S&P 500 and the Dow Jones Industrials indexes have risen over 5%.  Global markets are reacting positively as well. 

Hardly anyone would disagree with the premise that Mr. Market has been unusually emotional these past three years.  But the last couple of weeks have demonstrated just how emotional investors can get after a prolonged bear market.  The drone of bad news has been like a vise, applying increasing emotional pressure almost by the hour.  One negative development after another has pounded stock values down and risk-averse investments up. 

The week’s economic releases were, to say the least, mixed.  The worst of it came this morning as the government reported that theU.S.economy lost 308,000 jobs.  Some of these losses are likely attributed to the call-up of reservists, but certainly not the majority.