In some respects, this has been the toughest time in a quarter-century to be an investor. For the first three months of 2001, the S&P 500, which is the best barometer of large-company stocks, lost 12 percent. The NASDAQ, which mainly consists of technology companies, lost 26 percent.

With respect to investment performance, there have been worse quarters in the past several years. For example, the S&P 500 lost 14 percent in the third quarter of 1990 and a whopping 23 percent in the fourth quarter of 1987. However, what made being an investor particularly difficult this quarter was that the bad performance followed the dismal fourth quarter of last year, when the S&P lost 7 percent. That index hasn't lost more than 3 percent in two successive quarters since the end of the 1973-1974 bear market.

What Happened?

One unusual feature of this market decline is its persistence. Other downturns since 1974 have occurred much more quickly than the one we are now experiencing. Another unusual aspect is the disparity among different performance indexes. Over the past six months, the S&P 500 has lost 20 percent and the NASDAQ has dropped by 49 percent. Meanwhile, the Russell Large Company Value Index lost a mere 2 percent, and the Russell Small Company Value Index actually gained 8 percent.

Why the disparity? Well, remember the so-called new economy? It was populated by the high-technology firms that were revolutionizing the way companies ran their businesses and people bought goods. Meanwhile, many security analysts were forgoing the more basic businesses that were solid, yet unspectacular. Most of the worst performing sectors over the past six months have been new economy companies — for example, semiconductor stocks lost 45 percent and communication equipment stocks fell by 72 percent. During that same period, many of the old economy stocks fared very well — railroad stocks rose by 42 percent and construction stocks increased in value by 89 percent!

Last year's high prices of high-technology, growth-oriented stocks were largely driven by the rapid growth of the overall U.S. economy. As economic growth slowed, the premiums paid for technology shares slowed as well. Many investors held an abundance of higher-priced growth stocks so it is not surprising that their decline caused portfolio values to decline. Shares of the more basic businesses that comprise the value-oriented indexes did well, but since they made up a smaller portion of investors' portfolios, they didn't have much opportunity to cushion the losses.

Will the Decline Continue?

My belief is that the worst is over, for two reasons. First, although the economy has slowed, it is not in decline. The basic businesses now make up a larger proportion of the market's capitalization and these steadier stocks should create more of a cushion for the market as a whole.

Second, and more important, the slowdown in growth that led to the decline did not occur by accident. It was planned by the Federal Reserve Board and its chairman, Alan Greenspan. In May 1999, when economic growth was reaching its peak, the Fed began a series of six interest rate increases over 11 months that caused the federal funds rate to go up by 1.75 percent. The intent of these increases was to slow down economic growth and reduce the potential of higher inflation.

Well, it worked — perhaps too well. Economic growth did slow, but much more quickly than the Fed thought it would. That is why the Fed has cut rates three times over the past three months, getting back to within 0.25 percent of where interest rates were two years ago.

My point isn't to criticize the Fed — although I am tempted to say that the reversal and extremity of changed rates seem more like suggestions from Al Bundy or Alfred E. Neuman than Alan Greenspan. My point is that this slowdown in growth is not a natural phenomenon — it was "Fed-made." And, I don't believe that Alan can create a mess that he himself can't clean up.

What to Expect?

I am not suggesting that technology and other growth stocks will come roaring back to their early Y2K levels. But, I do believe the worst is over and the healing can soon begin. However, there will still be a lot of focus on key economic data that will suggest the economy has stabilized. Analysts will pay keen attention to information released on industrial production, retail sales, and information technology spending.

We will see a lot of day-to-day swings in the market. This is the same volatility we have been seeing since 1998. However, during the first two years, there was an upward trend in values so the swings didn't bother us too much. Now, they seem more painful.

What Should You Do?

In mid-March, we published a four-part article on how to weather the market volatility. My advice hasn't changed since then. If I were paid by the word, I would repeat the article here, but I'm not, so instead I'll provide a link.