Maintaining Momentum in Grim Times

We must be cognizant of the economic effects of the terrorist acts and the subsequent U.S. response. The consumer is certain to tighten his or her purse strings and consumer spending will decelerate. Additionally, government funds will likely be diverted to defense and many social programs could be negatively affected. While a military build-up and increased government spending could mitigate much of the economic effects from lower consumer spending, LOHAS businesses must adapt to a rapidly changed environment.

Among the positives to look for next year are full implementation of the National Organic Program, which was released in December 2000 to establish standards for the production and labeling of organic foods, and the prospective passage of a bill in Congress that would make nutritional supplements tax deductible. The latter would have positive effects on the entire alternative healthcare market, but we believe passage is unlikely. Additionally, the American pride and brotherhood that we believe always seems to dissipate near the end of a strong economy has been revitalized as Americans mourn, unite and prepare to retaliate against aggressors. We believe that this rising awareness and regard of citizens for one another is at the core of the socially aware practices of most LOHAS companies. Americans could very well unite to not only defend their nation but improve their environment. Good times may actually lie ahead.

The stocks of LOHAS companies have outperformed the market thus far in 2001, led by strong gains in the natural products sector and continued investor interest in alternative energy. While all of the broader U.S. market indices have fallen, the LOHAS index is relatively flat year-to-date. The prospects of military action in the Middle East could lead to gains in the alternative energy sector as our dependence on Middle Eastern oil is once again identified as a weakness. The prospects of further economic weakness should also lead investors to defensive investments in such sectors as nutrition and natural foods and beverages, as well as consumer-focused businesses that are nondiscretionary, such as healthcare.

As we write this commentary, just three days following the tragic events in New York, Washington and Pennsylvania, the U.S. equity markets have yet to reopen. But at the end of the day, the stocks that perform will be those of companies where strong business fundamentals exist—a hallmark of the LOHAS space.

In 2002, we expect much of the same macro environment as 2001, but with a weaker U.S. consumer. Obviously, the U.S. government's actions against terrorism will have far-reaching economic effects both domestically and globally. The travel and hospitality industries will be severely affected, as should most cyclical companies, such as in the financial industry and consumer durable goods. Given the number of variables in play, we find it very difficult to even hazard a guess at what will specifically occur in the U.S. economy and how that will affect the evolution of business in the LOHAS market. However, we remain confident that the underlying trends that have led to growth in various LOHAS sectors will continue to spur future expansion of the market. American consumers will continue to purchase natural products, and prospects remain excellent for broad mass market acceptance of natural products, alternative sources of energy, and alternative/integrative healthcare. We anticipate continued outperformance by the LOHAS sector.