August 9, 2004
BY TAMMY CHASE
The Chicago Sun-Times Business Reporter

Banker Michael Allen has endured the tumultuous stock market of recent years by not dramatically changing his investments. He figures that at 38 years old, he's young enough to ride it out.

Brian Farrell just quit a job at a mortgage banking firm because he was unhappy, and feels good that his accounting and finance background will land him work elsewhere.

And Josh Newman, a third-year family practice resident at Advocate Illinois Masonic Hospital, skips investing for now and has developed a successful side business of developing medical software that he says will make his life more financially and intellectually enjoyable.

These three Chicagoans are adapting to an economy that is starting to improve, although last week's economic reports of anemic job creation and retail sales in July suggest that recovery is coming in fits and spurts. Overall, however, the economy is improving: There have been 1.2 million new jobs created so far this year, after more than 2 million were lost in the previous three years. The unemployment rate fell to 5.5 percent in July, after hitting a recent peak of 6.3 percent in June 2003. Manufacturing has expanded, and growth in the nation's gross domestic product has picked up.

When will their investment portfolios, and those of other Americans, wake up and take notice of the economy's progress?

"I just looked at a statement today, and I was very [angry]," Farrell said with a laugh.

The stock market seems oblivious to the economic recovery. The Standard & Poor's 500 Index, the Dow Jones Industrial Average and the Nasdaq index have all lost ground since the beginning of the year, even though corporate profits generally have been pretty good.

Why isn't the market keeping up?

"The market usually leads" an economic recovery, said Ralph Wanger, founder of the Acorn mutual fund family. "One could argue that the recovery we've had was predicted by the market last year."

After three losing years, the Dow Jones and Standard & Poor's indexes returned about 25 percent in 2003, and the Nasdaq climbed a robust 50 percent.

This year, the market has plenty to be nervous about. Inflation, particularly oil and commodities like steel and lumber, is a big concern because those higher prices cost companies more to produce their goods. China's booming economy and its insatiable demand for commodities and services is behind some of that inflation, said Donald Coxe, chairman and chief strategist of Harris Investment Management Inc. Chinese companies are making and exporting more products, meaning they need more steel and other commodities, which is pushing up prices.

Oil prices, which set a new record this week, don't show signs of easing, Coxe said. Inflation typically is a downer for stock markets, because it could crimp profits for companies with higher materials expenses.

The lessons of the stock market and a rebounding economy, have Newman, the medical resident, planning for the future by supplementing his work and income. The 35-year-old Wicker Park resident sells customized software to companies like Advocate that allow it to computerize residents' work schedules and other aspects of running a residency program. With employers like Advocate showing signs of willingness to invest in technology -- one signal that the economy is bouncing back -- Newman said his software business is doing well.

"Practicing medicine is less lucrative than it was. Tuitions are high. Malpractice is incredibly higher ... [and there are] lower reimbursements." he said. "The more versatile you are -- especially in an economy like ours, which seems to change weekly -- the more solid and secure one's future can be."

Farrell, 32, has been through a shaky job situation before. He worked at Arthur Andersen, the Chicago accounting firm ruined and shut down by accounting scandals, but was able to move to another accounting firm from there. The job market now has more leads for his type of work than he saw a few years ago, giving him the confidence to leave a job he didn't like and search for something more fulfilling.

"I guess I feel good," he said. His wife, who is employed, will support him during his search.

Allen works for LaSalle Bank's wealth management division, advising wealthy clients, usually older than he, on what to do with their investments. He's personally kept his basic investment strategy that he's had for years, though he says he's a little "less aggressive" about stocks.

The market may stay out of synch with the economy for a while longer, Wanger said.

In accepting the Democratic nomination for president earlier this month, Sen. John Kerry promised to reverse some tax cuts put into place in 2001 and 2003, a vow that makes investors skittish. Income and corporate dividend tax cuts helped to fuel last year's stock market rally.

"I think one of the things worrying the market may be the election," Wanger said.

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