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November 22, 2002, 9:00 a.m. Bye Bye Bear The psychological evidence is in: We’re not going lower.

here are many market observers who take turns telling us where the stock market is going. One West Coast fixed-income guru forecast a 5,000 Dow Jones. Others say that equities are "expensive," basing their evaluation on the P/E multiple of the market (that's the price of stocks divided by earnings of the company). Then there are a few courageous souls who are identifying the October 9th low as the end of the market decline. However, these optimistic forecasters provide little concrete evidence that a market bottom has been reached.

Well, I'll go out on a limb and commit to a forecast that we are in a new bull market. And as opposed to the more experienced, higher-paid forecasters, I'll provide some solid psychological evidence that the lows have been reached.

The first piece of evidence is Wall Street decision-making. Over the past few weeks, Wall Street managers have begun laying off some of the great bulls of the 1990s. For example, Tom Galvin — possibly the best financial-market analyst on Wall Street — was laid off by Credit Suisse First Boston. On Friday November 15, the Wall Street Journal reported that Lehman Brothers had fired Jeffrey Applegate, another top quality investment strategist who tended to be more bullish than bearish. Merrill Lynch decided to fire Bruce Steinberg, another excellent market analyst and a continuing positive force on market expectations. Who was it that said "we're bullish on America?"

Wall Street's recommendations form the second piece of evidence. After a bear market of historic proportions — with stocks selling 40% below their economic value — there is a plethora of sell recommendations from professional analysts. Recently two major firms came out with sell recommendations on General Electric and Intel. General Electric peaked at $60 in the year 2000 and now sells at $24, down in price by 60%. Similarly, Intel peaked at $75 in 2000 and is now selling at $19, a decline of 75%. Two of the great companies in America have been rated "sell" after enormous price declines. As CNBC's brain would say, here comes another lamo award.

The third piece of evidence can be found in portfolio-management changes in the mutual-fund industry. A few weeks ago I wrote about the Fidelity Aggressive Growth Fund as an example of a fund that had an interesting tax advantage for investors. My one hope was that Fidelity wouldn't change the fund manager right at the market bottom. Well, last week, that's exactly what they did. Bob Bertelson, manager of the fund since early 2000, was reassigned to Fidelity's Asset Management Income Fund that invests mainly in bonds (he will manage the equity portion of this conservative fund). It sounds like a tough transition to me — and it's certainly tough for both Bob and the mutual fund shareholders.

All of these decisions point to the fact that even the management of Wall Street's top brokerage firms have zero ability in determining which way the market is going. And when all these managers go in the same direction, it's an important counter-indicator for the average investor.

On a less psychological note, the Fed's shift to aggressive easing by lowering the fed funds rate to 1.25% was another arrow in the bulls' quiver. If you take into account inflation, the fed funds rate is now about a negative 0.75%! Historically, there has been nothing like low interest rates and more money to get the stock market going in the right direction.

The last and maybe the most powerful factor of all is the prospect for tax reform reverberating through the 2003 economy in the aftermath of this month's national election. The elimination of the tax on dividends at the corporate level could do wonders for the earnings of dividend-paying companies. If corporations don't pay taxes on dividends, then their earnings will go up by the amount of the tax on the dividends. Lower P/Es would follow, leading to higher stock prices. Dividend payout ratios should also rise, providing investors with a reasonable current return on their investments.

More, the establishment of private accounts for retirement savings — funded by part of an individual's Social Security contributions — could contribute to an increased demand for common stocks as well as other securities. Also, changes in private retirement accounts that allow for increased contributions will also improve the demand for stocks and bonds.

Before the election, proposals for tax reduction were all pie in the sky dreams; now some of these tax options are on the front burner of a Republican-dominated Congress. Any or all of these ideas will contribute to an improved stock market environment.

So, in the meantime, don't get frantic when the Dow Jones takes a little slide. A little Wall Street psychology indicates that things can only get better.

— Tom Nugent is Executive Vice President & Chief Investment Officer of PlanMember Advisors, Inc., and an investment consultant for Wealth Management Services of South Carolina.