Down but Not Out, Local Stocks Fare Better Than the Dow

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By Jerry Knight
Monday, July 4, 2005

How much money have you lost in the market so far this year?

Probably not a lot if you invest primarily in local stocks because they have outperformed the market over the last six months.

These days "outperforming" often means losing less money than other investors. Such a "victory" doesn't contribute to long-term asset accumulation, but it may be the most Washington investors can hope for.

"Sometimes not losing money or making just a small return -- like a Treasury bill return -- is the best option," said Steven H. East, chief economist for Friedman, Billings Ramsey Group Inc. in Arlington.

East is forecasting that the economy will keep growing at a solid 3.5 percent annual rate for the rest of the year, but "the stock market is going to continue to struggle with a Fed that continues to raise rates and with worries about oil prices."

The market is particularly hazardous for individual investors because few industries have been able to resist the malaise in the markets, which has left the Dow Jones industrial average off 4.7 percent for the first half, the Nasdaq Stock Market composite index off 5.5 percent and the Standard & Poor's 500-stock index down 1.7 percent.

The Washington Post-Bloomberg index of regional stocks fell slightly less than the S&P. It's off 1.6 percent, with the majority of District, Maryland and Virginia stocks down for the first half.

None of this was supposed to happen. Stocks came into the year on a roll, accelerating steadily after the November election. But the market went off the tracks when crude oil prices hit $60 a barrel, the Federal Reserve kept boosting interest rates and the war in Iraq refused to get off America's radar screen.

Weaving around those hazards proved tricky for investors, because the markets did not always react the way most people expected.

Iraq helped Washington's defense contractors and government services firms maintain their status as the region's most unshakable industry. Most players made single-digit gains, although shares of Bethesda-based Lockheed Martin advanced 17 percent. And United Defense Industries of Arlington was up 59 percent before the completion last month of its $4.2 billion sale to British-based BAE Systems.

But as Bank of America chief market strategist Joseph P. Quinlan said last week, Iraq "represents the unappreciated wild card to the financial markets."

What he calls the "Iraq effect" produces three negatives: "policy paralysis in Washington, deterioration of the U.S. balance sheet [with big budget and trade deficits] and rising anti-Americanism abroad, a trend that could undermine global profits."


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© 2005 The Washington Post Company

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