About Edgewood
Edgewood Team
Performance
Marketing
News
Compliance
Contact

Client Login
Edgewood Management Company

VIEW FROM EDGEWOOD



ECONOMENTS

Edgewood Management Company
April 7, 2003

War and Peace

The single issue of importance to the world and the market in the first quarter of 2003 was the chance of war in Iraq. Geopolitical tensions were the primary drivers of market performance, while fundamental factors such as corporate profits, inflation and interest rates became less relevant.

Despite all the gloomy news that dominated television and newspaper headlines, the stock market held its own in the first quarter and ended up 10% from the July and October lows as measured by the Wilshire 5000 index. As we write this letter the stock market is up marginally for the year, this in a period where the news flow on the ‘information superhighway’ has had many speed bumps. The stock market continues to be the ultimate sage. It discounts news and reflects the future. The apparent risks today are certainly much higher than usual, but they are well recognized (many markets are down 50% or more from their highs). For equity markets to move higher, the news flow does not have to be stellar, it just has to be better than what is already discounted. The markets dramatic mid-March rally suggest that investor sentiment and valuations are sufficiently restrained to provide the platform for higher stock prices when revenue growth starts to materialize in the post war economy.

We believe the market has established a bottom that it again tested in mid-March. While we are well aware that the markets peaked three years ago, what is more interesting to us is the fact that companies with growth characteristics have done better than value stocks since the middle of 2002, as represented by the out-performance of the Russell 1000 growth index versus the S&P 500. At the beginning of the war stocks were at roughly the same valuation levels they were at in 1991 when the first Gulf War began, in an environment where interest rates are at much lower levels than in 1991. The price of oil started to decline as soon as it became evident there would not be major damage to the Iraqi oil fields. This can only help give the consumer and business some additional confidence and spending power.

How the geopolitical events play out is, of course, an unknown. What we do know is that all crises eventually come to an end. When this crisis does come to an end Washington should become more focused on effective economic stimulus. The elimination of taxes on dividends should be welcome news to the market and appears, as of this writing, to be on its way to passing in some form. Our portfolio companies have proven themselves survivors by coming through three years of economic slowdown in good shape with strengthened balance sheets and strong cash flows. Many of them continue to grow and take market share in tough economic conditions. We hope the next time we write you we are no longer thinking about war, but its aftermath.


Back to the top of this page

 
350 Park Avenue, 18th Floor New York, NY 10022 - Phone: (212) 652-9100 - Fax: (212) 652-9101

Legal Disclaimer / Terms of Use