To put it mildly, we live in unsettled times. The worries seem to mount each day. Most tragic - and most recent - were the September hurricanes: the terrible destruction along the Gulf Coast and neighboring areas underscores the power of nature and our own inability to predict or control such events. Then there is the war in Iraq, which seems to get messier each week, and the January elections in that country remain a question mark. Of course, the U.S. election approaches as well, highlighted by nasty rhetoric, ever-changing positions and a legitimate question of whether the outcome is likely to make any real difference for folks other than the politicians themselves. Unresolved economic issues then spring to mind: the future direction of oil prices, inflation and interest rates, as well as the pace of economic growth. And even the messenger itself faces turmoil these days: traditional sources of news and information are under assault from alternative providers such as internet blogs and more partisan outlets. If long ago Walter Cronkite's voice seemed to reassure us during turmoil, today merely an intriguing rumor might pass the smell test (e.g. Dan Rather). The media business is clearly in flux and the viewer's confidence has been shaken. Needless to say, events and conditions all around us seem to cry out for more certainty and resolution.

The market's response to this state of affairs, as we all know, has been quite muted. In fact, as we pointed out three months ago ("Stuck in Neutral"), the lack of overall equity market volatility in the face of numerous macro concerns is strange (so far this year, volatility is at a 50-year low!). If anything, investor uncertainty and trepidation have grown since mid-summer, and the broad market indices - and our portfolios - are essentially flat for the year. It appears as if investors are "sitting on their hands", waiting for one of the known market catalysts to resolve itself and coax from investors a more active posture. The data would seem to confirm this hypothesis: households are swimming in liquidity (cash in money market funds and savings accounts has doubled since 1995 and now sits near $5 trillion), while the rise in real estate prices has driven household net worth to a record $46 trillion. The cash buildup is even more remarkable when one considers that the yield on such short-term investments is so low today.

So, many investors are on the sidelines, intently focused on a number of issues that will hopefully be resolved over the next several months. Even with such substantial liquidity yet low nominal returns on cash and fixed income, most investors seem comfortable waiting for resolution of certain issues before turning more aggressive. This is not an unusual situation, but as we would note, the signals to dart in and out of the equity market are rarely clear or easily predicted. It is human nature to want more clarity when matters seem so unsettled, yet as an investment strategy, we believe it is very difficult to try to correctly outguess events and other investors with any regularity.

As long-term, value-oriented investors over the past three decades, we clearly recognize the virtue of patience and attention to value in growing one's investment capital. But we also know that there is a difference between patience and retreat. One of our colleagues used to remark: "The toughest time to invest is always NOW". In other words, it always seems as if there are dozens of reasons to avoid committing capital to the equity market. Yet anyone who can read a chart of the market's performance over the past century can recognize the opportunity missed if one were to withdraw inside of a cave and avoid stocks. The fact is that stocks have offered substantial real returns over the years while investors have faced natural disasters, conventional wars, nuclear standoffs, social upheaval and political intrigue; eventually, there is resolution and life goes on. The equity markets have faced these challenges and prospered in the past, and we expect a similar pattern in the future. While we are ever reluctant to predict the market's performance over a short time span, we are encouraged about the prospects for good relative returns - and acceptable absolute returns - for stocks in general over the next few years. To be brief, we take the most comfort from the following factors we believe to be true:

The Economy Is OK. When the estimate of third quarter Real GDP is released in a few weeks, the data will likely show the U.S. economy has grown for 12 consecutive quarters at an average rate of about 3.5%. That's not bad, and in fact, it easily exceeds the average rate of growth for the last recovery (which started in 1991 and produced one of the longest expansions on record). Employment growth has been disappointing, for sure, but fierce global competition - which has helped keep inflation and interest rates low - is a painful but long-term benefit to productivity and growth. Oil prices are worrisome, but current prices will accelerate exploration and the use of alternative sources. In the meantime, energy costs take a much smaller bite of consumer incomes than they did two decades ago during the last crisis, and as the most recent GDP statistics indicate, high prices have dented but not derailed the economy's trajectory.

Corporations Are Flush With Cash. Strong earnings growth over the past three years (averaging about 19% annually, according to ISI Group) has swelled corporate bank accounts. The early guesses for 2005 are for 10% growth, still above average. Like the household data cited earlier, companies have been somewhat reluctant to spend their growing cash on growth-oriented projects, preferring instead to pay down debt; according to the Fed, corporate balance sheets are in their best shape in four decades. Ultimately, however, this low-yielding cash is the raw material for new capital spending projects, new jobs, industry consolidation as well as dividend hikes and share repurchase. All of these options can help drive intrinsic values higher, which should be supportive of better long-term equity market performance.

Market History. Since the beginning of the 20th century, there has been just one ten-year period (1928-1938) when stocks failed to post gains. Including dividends, the S&P 500 is now down since the end of 1998, nearly six years, even as the economy recovered and interest rates remained low. As one thinks about the next four years - a reasonable investment horizon - the odds favor improvement. Furthermore, even bonds have beaten stocks over the trailing seven-year span, a one-in-ten probability. Bearish analysts point to the Fed's determination to raise interest rates as a serious negative, but there is a precedent for a positive outcome: in the early 1960s long-term bond yields held near 4% while the Fed raised rates by 300 basis points. And the stock market rose about 7% annually while inflation averaged a mild 1.5%.

The Election. Assuming no Florida repeat, the marathon will be over in just a few weeks. The political "game" this past year has been striking, given the extreme rhetoric from not only the candidates, but also wealthy outsiders, filmmakers and, increasingly, the media itself. In fact, the media's newfound partisanship, fragmentation and lower standards have contributed to these unsettled times by raising the general level of skepticism. Ideologically, the country now appears to be as divided as ever, but from our perspective, the distance between the candidates is actually quite small. We think it's unlikely either candidate would have a mandate to move to a more extreme position on the economy or Iraq; it really seems the fervor on both sides is driven more by personality than substance. In any case, the market has performed well under both parties for the past century (Democrats hold a slight advantage, 14.2% vs. 13.6%). The most important point here: this issue will be settled very soon.

All is certainly not sugar and spice, and of course there are no guarantees. But from where we sit, we believe the conditions remain favorable for equities over the next few years, particularly given that overall market valuations are more attractive than several years ago. In the near term, many of the issues rattling investors - the election, hurricanes, Iraq - are moving toward resolution in some way or another. Admittedly, the situation in Iraq is impossible to predict with any certitude, but the elections in that country approach, and we will have an answer in just a few months. Again, the stock market has dealt with similar issues before, and we expect it can successfully navigate them once again. We believe valuations for the companies we follow are reasonable today, and the opportunities become more exciting as profits rise and the stocks remain flat. Our primary focus remains on the portfolios of higher quality, attractively priced securities we manage, and with major issues moving ever closer toward resolution, we feel confident in our clients' long-term prospects.