THE MARKETS
Weak retail sales coupled with mounting war concerns sent stocks lower last week as both the Dow Jones Industrial Average and the NASDAQ finished in the minus column. As the year nears an end the Dow is positioned to record a loss for the third year in a row. For the week, the Dow lost 208 points and closed at 8303 (-2.44%). The NASDAQ also slipped losing 15 points (-1.10%) and settled at 1348.The percentage of bullish investment advisors is neutral at 49.4% down from 50.6%. Readings over 54% are regarded as bearish. For a change, U.S. equity mutual funds had inflows totaling $3.6 billion for the period ending December 24th, compared to outflows of $3.6 billion the previous week.
A host of factors — including ongoing political tensions around the globe and worries about soft economic growth — have hurt the market lately. The seasonal strength that is so common late in the year has failed to materialize. Geopolitical concerns mounted last week as a truck bomb ripped through Chechen government headquarters killing upwards of 52 individuals, tensions over North Korea’s recently divulged nuclear weapons program have increased, and in Venezuela, a nearly month-long nationwide strike aimed at toppling the president forced the world’s fifth-largest oil exporter to import gasoline. Venezuelans formed mile-long lines at gas stations, according to news reports.
THE COMPASS PORTFOLIOS
No changes to our portfolios during the past two weeks. We end the year sporting a nearly fully-invested posture, targeting both value and growth styles, as well as all of the major market capitalizations (large, mid and small caps). Our recently enhanced utility index position has performed as expected, and has recently paid its quarterly dividend. We expect this position to offer better downside protection when interest rates begin to rise, with the potential for additional capital gains over the next year.
For several clients, we continue to be more conservative than our models prescribe, preferring to delay an increased equity exposure until geopolitical and economic news shows greater clarity. As we enter 2003, the bear market will have reached 1,027 days, easily surpassing the average duration of around 500 days. While we haven’t seen four consecutive down years in the markets since the great depression, the Compass Portfolios will continue to focus on investment risk management, prudent asset allocation, timely responsiveness to the markets, and a commitment to objective research and guidance.
THE ECONOMY
On the economic front, new home sales surged 5.7% in November to a new record 1.069 million pace from an upwardly revised 1.011 million unit pace in October (from 1.007 million). This report was much stronger than expected; economists had expected a slight decline in sales. Home sales continue to defy gravity, with low mortgage rates and the safety and nesting trend remaining positive incentives.
The equity and Treasury markets will be closed for the New Year’s Day holiday on Wednesday. Thursday starts with the ISM manufacturing survey and jobless claims data, while Friday rounds the week with construction spending and auto sales.
