April 6, 2004

To Our Clients and Friends,

The Economy
Despite the political rhetoric, the economy is in a very good place. We have low inflation (good), historically high employment (good), healthy economic growth (good), increasing productivity (good), and low interest rates (good). In other words, we have come a long way since 9/11. We have the highest living standard in history. Although the economy continues to prosper as a whole, there will be sectors of the economy that have difficulty. There is always something to worry about, but the truth is that the economy is in a good place and should be for some time to come.

The Markets
The trends in the equity market during 2003 continued on into the first two months of 2004. March saw a pullback, which we expected, given the unexpected large returns of the prior 11 months. We are still expecting a choppy market with single digit returns in 2004.

Bond Talk
The bond market has been doing well with prices up and yields down. During the equity bear market of 2000-2002; bonds were one of the best performing asset classes. Although they were the worst segment in 2003, they still had a positive return. Bonds have been in a bull market of their own for over 20 years as interest rates fell. But bonds are not without risk. Most people think of bonds as a "safe" investment, and often times, retired people overly rely on bonds in their portfolios. However, at this time, it is more likely that interest rates will go up than down as unemployment falls and inflation starts to increase. That means bond prices will fall.

For just as people were underestimating the volatility and rise of stocks in the late 1990's, many are overestimating the "safety" of bonds now, especially with the March pullback in equities. Yields have gone from bad to worse, but falling interest rates mean rising bond prices. That was a welcome event given the bear market in equities.

Yet, what goes up can come down. If rates do increase, expect bond prices to come down. For every 1% increase in rates, expect bond prices to fall by the amount of the duration (think maturity's cousin) of the bond. For example, a bond with a 5-year duration would fall 5%, and a bond with a 10-year duration would fall 10%. Maybe it is time to think the unthinkable. Maybe the stock market doesn't look so risky compared to the bond market.

In anticipation of rising rates, we have become defensive by shortening the duration of our bond holdings to cushion the impact of a rise in rates.

Remember
Remember to maximize your contributions to your retirement accounts to save for your future, to increase your financial security, to take advantage of the tax-deferred growth, and to benefit from dollar-cost-averaging. When stocks are down, you're able to buy more shares or stock for the same amount of contribution dollars—with the idea that they'll eventually grow in value, while at the same time your older "down" securities will regain value as the market continues to rebound.

As usual, please feel free to call us. We are here to answer your questions, respond to your concerns, and help you make smart decisions about your money.

Very truly yours,

ZRC Financial Services, LLC
A Registered Investment Advisor

By:
         Richard P. Clarke

RPC/ih