THE MARKETS

The bulls took over late in the week triggering a massive short squeeze that saw the Dow Jones Industrial Average post its best performance in five months. Thursday’s 269.68 point gain (+3.6%) was the largest point and percentage move since October 15, 2002. On a percentage basis, the NASDAQ jumped even higher as it added 61 points (+4.8%) to close at 1340.77. Whether the rally has any staying power remains to be seen. For the week, the Dow gained 119 points (+1.54%) and closed at 7859. The NASDAQ, led by semiconductor stocks, which jumped over 8%, gained 35 points (+2.68%) and finished at 1340.

The percentage of bullish investment advisors finally crossed into bullish ground at 39.8%, down from 41.5% the previous week. Readings under 40% are bullish. For the period ending March 12, 2003, cash outflows from equity mutual funds totaled $3.0 billion compared to outflows of $3.7 billion the previous week. Outflows from equity mutual funds now total $78.4 billion over the past thirty-nine weeks.

One of the key factors in the renewed market weakness is the escalating federal budget deficits looming over the next few years. Estimates now put the 2003 federal deficit as high as $90 billion, assuming there is no war in Iraq. The “Coalition of the Willing” is quickly turning into “The Coalition of the Billing” as country after country demands money and military aid from the U.S. in return for cooperation against Iraq and terrorism (i.e. Turkey, Qatar, United Arab Emirates). The price tag is growing, and some in Congress are questioning the strategy.

Investors will also keep an eye on Tuesday’s meeting of the Federal Open Market Committee, the Fed’s policy-setting arm. Most economists don’t expect a rate cut, but many observers are expecting a shift in the Fed’s risk assessment from balanced to one of economic weakness, especially in light the surprisingly large drop in nonfarm payrolls earlier this month, and the ongoing rise in oil prices.

THE COMPASS PORTFOLIOS

No changes to our allocations during the past week. Given the war concerns, the surprisingly high unemployment figures released last week, the surging federal budget deficits, and no real improvements in capital spending, we are justifiably cautious. That being said, history has taught us that markets can respond positively to successful military action, such as in the 1991 Gulf War, which saw the Dow add approximately 20% within the first three weeks of Operation Desert Storm. We continue to weigh the paradox of doing too little versus doing too much, and we believe our balanced allocations are prudent at this time.

THE ECONOMY

On Thursday, the Labor Department reported nonfarm payrolls dropped by 308,000, the largest decrease since November 2001, versus the 5,000 increase forecast per Dow Jones Newswires. However, January was revised up to +185,000 from +143,000 along with December to -147,000 from -156,000. This nets out to -262,000 relative to February’s estimate and the previous figures for December and January.

Unemployment rose to 5.8%, as expected, from 5.7% for January. December’s unemployment rate was left at 6.0%.

The spark in Thursday’s market occurred amid a significant downturn in retail sales. The Commerce Department reported that March retail sales plunged 1.6%, while the ex-auto aggregate dropped 1.0%. The figures were much weaker than expected. The winter storm that blanketed the East Coast around mid-month, which already had wreaked havoc with unit vehicle sales and chain store sales, was clearly the big factor dampening sales on the month.

Lastly, the University of Michigan’s consumer sentiment index fell to 75.0 in the preliminary report for the month of March. The level was down from 79.9 in the final report to February. This figure points towards growing losses in consumer-sensitive sectors, especially retail stocks.

Tags: Dow Jones Industrial Average, Economy, investment, Markets, mutual funds