THE MARKETS

As the war wound down, investors turned their focus to a slew of mixed corporate earnings reports. The Dow Jones Industrial Average managed to close above its 200-day moving average (the average closing mark on the index for the last 200 days) on both Monday and Tuesday. This was the first time the Dow has been able to accomplish this feat since May 2002. However, the party was short lived; the blue chip index couldn’t hold above this important resistance area as it gave back 144.75 points on Wednesday. Thursday saw the Dow make another run at the 200-day moving average as it added 80 points. For the week, the Dow Jones Industrial Average gained 134 points (+1.6%) and closed at 8337. The NASDAQ, bolstered by Intel’s positive earnings report managed a gain of 67 points (+4.9%) and finished at 1425. Unlike the Dow, the NASDAQ has held above its 200-day moving average since the start of April.

Evidence continues to suggest that the March 14th bottom (Dow – 7416.64) marked the low point for the three-year bear market. If true, the bullish allocations we currently prescribe position our clients prudently for a resurgent market. As it is exceptionally difficult (if not impossible) to predict market direction over any extended length of time, declaring the recent bear market “finished” is also difficult, and perhaps dangerous as well, given the continued economic and geopolitical challenges (see below for Compass Portfolio commentary on this subject).

THE COMPASS PORTFOLIOS

All models are currently sporting positive prescriptions, and we are now taking steps to prudently reduce the remaining defensive pockets in client portfolios. Existing clients will recognize the rarity of being fully invested (or nearly so), given the defensive posture we have embraced over the past several quarters. We choose to participate in the current market environment, given the easing of geopolitical events and somewhat better (but still cautious) guidance on the corporate earnings front. As always, if the trend changes, we can easily respond by reducing positions. The current environment appears more accommodative for capital growth, which is reflected in the improved allocations.

Clients, strategic partners and friends alike often ask whether I believe the markets are likely to demonstrate the kind of growth we saw in the late 1990s, and I try to consistently offer the same guidance: I believe the best service I can offer my clients is to ensure that their portfolios are positioned consistent with the market we are currently in. Being positioned prudently means being “on the right side of the market,” that is to say on the same side of the market as the large institutions (mutual funds, hedge funds, institutional investors, etc.). This disciplined method of wealth management can also be described as the “let the trend be your friend” approach, and is arguably the most responsive and objective asset management process available to investors today.

THE ECONOMY

Suddenly, the economy doesn’t look all that bad. Wall Street observers were a bit dazed to see March retail sales come in far better than expected. The Commerce Department said sales lifted by 2.1 percent, significantly better than the 0.6 percent economists polled by Reuters expected, and a sharp snapback from February’s 1.3 percent drop. Take away autos, and sales still increased 1.1 percent.

U.S. wholesale prices shot up in March amid higher energy costs and a surge in car prices, the government said in a recent report that was at odds with expectations of much milder inflation. The Producer Price Index, which measures prices paid at the factory, farm and refinery gate, jumped 1.5 percent last month after a 1 percent gain in February, the Labor Department said. The March gain was more than triple the 0.4 percent rise projected U.S. economists in a Reuter’s survey. Stripping out volatile food and energy costs, the core PPI rose by 0.7 percent, in contrast to expectations that it would stay steady.

The University of Michigan’s consumer sentiment index also rose to 83.2 from 77.6 in March, according to market sources quoted by Reuters. Economists, on average, expected a reading of 78.1, according to Reuters.

Tags: Asset, bear market, Dow Jones Industrial Average, Economy, growth, Markets, mutual funds