SEATTLE/ Conservative Monitor -- Those promoting investment in the stock market are suggesting that the economy has reached the bottom or near bottom of a trough and that now is the time to invest in stocks. They support their argument with historic data indicating length of a market correction and show that investing at or near the bottom will result in gains of thirty percent or better. The one statistic they fail to mention is that at the bottom of a market correction, the price-earnings ratio is usually much lower. Current earnings and projected earnings for the next several quarters would suggest an additional correction in stock prices, especially tech stocks, is likely to occur before the bottom of the market is reached. Even assuming the economy will improve soon and earnings rebound it is unlikely that a major market move is in the works. The conditions that existed in the 1990's, opportunities to cut costs and improve efficiencies, no longer exist to the same extent, are no longer present.

As mentioned before, the bias of government data towards maintaining the trend and direction of economic activity means an economic correction may be under way before it is confirmed by this data. We are now seeing revisions to government economic data that suggest the economy has not been doing as well as previously reported. Consumer spending and a somewhat robust housing market have supported continued economic growth but both these areas seem to be weakening. There is some evidence that the housing market may have peaked and if history is any lesson, in good times banks are less than diligent in requiring a sufficient down payment or assuring the credit worthiness of buyers. Unless the overall economy improves a downturn in the housing market could become a problem.

Housing markets that have rapid increases in prices appear to go through a cycle. Demand for housing increases due to a major expansion of a local company or a general improvement in the economy. As the demand for housing exceeds demand builders increase activity but lacking enough building trade personnel they import employees. This further increases the demand for housing. As the value of houses increases people begin to use their gain in equity to trade up adding further to demand for houses. A sign of this stage in the cycle is the significant increase of local buyers, rather than new people moving to the area, as a percent of the total number of buyers. At or near the peak, houses are on the market only a few days where it is not uncommon for buyers to bid above the asking prices. Buyers have begun to speculate in the housing market, buying houses to rent expecting to make money on price appreciation. As house values begin to exceed the price people can pay, without lower interest rates, prices begin to stabilize. Houses now take longer to sell. When a correction comes houses prices can contract significantly as long time owners are willing to accept less and as the speculators decide that managing a rental house that is not increasing in value has little appeal.

An early sign that prices have begun to stabilize or fall is how the industry reports the statistics. At the market peak houses sell as is and usually within a few weeks of coming on the market. The first break in the market doesn't appear in price but in negotiated improvements. Sellers no longer receive multiple offers and sellers become willing to make improvements as long as they get the desired price. Before the peak the industry is reporting month-to-month gains encouraging people to buy quickly before prices increase even more. As prices begin to retreat the industry begins to report quarter over quarter numbers and finally year over year numbers are reported, suggesting that market prices continue to advance when in fact prices are dropping.

Usually, these markets have been local. California went through the cycle in the late 1980's peaking in around 1990. Houston and Alaska had a similar cycle in the early 1980's. With the tech boom, the housing market cycle appears to be more wide spread then in the past and as a result a major correction presents more risk to the economy. Prices have already dropped significantly in the San Francisco Bay area. Denver, Seattle, as well as many other areas that had a heavy tech presence and that experienced hefty increases in house values are at risk.

The tax refund is expected to put some life back into the economy. While some may spend the refund immediately, the refund will have minimal impact on consumer spending. The amount is not enough to change the lifestyle of most people receiving the refund and with the rapid increase in credit card use it doesn't appear that people have pent-up demand for consumer goods. Perhaps more promising is the drop in energy prices. The increase in oil prices has acted as a tax on the consumer. If prices decline enough, it should help the economy, as much of the savings in energy spending may be spent on other consumer goods.

It is also assumed that the release of Microsoft's new operating system, XP, will revive the market for computers and computer software. The benefits to business or the consumer that would justify a major investment are difficult to identify based on early reports of the XP operating system. The majority of computer users, whether in business or in homes, only use word processing, simple spreadsheets and email. The novelty of the Internet has worn off and most users have identified the most attractive sites for their needs. Systems sold in the mid-1980's are sufficient for to meet these needs. While there may be a slight up tick in sales, business is still trying to digest purchases made in preparation for Y2K. With corporate profits declining, the easiest purchases to forgo are investments in upgrading computer hardware, software and phone systems.

It doesnt appear that foreign economies will help the pull the US out of its malaise but may actually add to the problem as US exports to these countries decline. Europe is having their own problems as is Japan, Argentina and other Asian economies. The bottom line, a major economic recovery and increasing stock prices do not appear to be in the immediate future. The economy will struggle to recover and a mild recession is very likely. At a minimum expect growth to be anemic for at least several quarters. In this environment investors will need patience and stock picking skills to avoid losses.