October 15, 2002

At the beginning of the quarter our forecast did not paint a rosy scenario. We called for a positive but weak real GDP growth rate, accompanied by a rising inflation rate and a temporary surge in real corporate earnings. That is not a mix that creates a bull market environment. At the time we argued that short of a positive policy shock we didn't see a sustained stock market rally. Then and now we believed that a Republican victory in both the House and the Senate and/or a quick resolution of the Iraq situation could prove to be the catalysts for the much needed rally. A successful campaign will reduce the terrorism equity risk premium. A quick victory in Iraq will force the rest of the countries to tow the antiterrorism line. The reduced uncertainty should lengthen investors, horizons boosting asset prices, in particular those with a longer horizon (i.e. growth stocks). In fact we attribute the recent stock market rally to the passage of the resolution endorsing President Bush's Iraq policy.

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