THE MARKETS
In the face of rising interest rates, stocks lost some ground last week as the Dow Jones Industrial Average finished in the negative column for the first time since late June 2003. On Thursday, the Dow hit a high of 9361.40, a level not seen since July 8, 2002. But an ensuing selloff left the Index with a gain of only 33.75 points. Despite the gain, the Dow ended the week down 131 points (-1.4%) and closed at 9154. The NASDAQ, which traded near the top of its recent range all week, lost 15 points (-0.9%) and settled at 1715. For the year the NASDAQ is up over 29% while the DJIA has gained more than 9%.
Since June 30, 2003 the S&P 500 has been in an extremely narrow trading range of only 33.34 points (3.42%). This narrow trading range in part reflects the reluctance of institutional money managers to substantially adjust portfolio positions. It also reflects our belief that the markets are fairly valued, given the recently announced corporate earnings and revenues figures. More importantly, it reflects our belief that for current valuations to be sustainable, corporate earnings must continue to show improvement during the coming quarters.
The summer malaise will likely continue through the end of August as little new corporate data is expected, President Bush is managing the U.S. economy from the “Western White House,” and institutional portfolio managers wrap up their summer vacations.
THE COMPASS PORTFOLIOS
No changes again this week. The narrow trading range we mentioned above has resulted in only minor adjustments to portfolios, due in large part to “stop loss” orders that were temporarily triggered to protect recent gains. Most positions trimmed back as a result of this activity have now been restored; however, we stand ready to take action should the trading range break through key levels.
Readers of “The Compass,” The Appleton Group’s quarterly client newsletter, will remember our article from April comparing growth in a portfolio to growth in nature (a relatively new discipline called Biomimicry). One tenant of nature involves sowing seeds when conditions are favorable for growth, a circumstance we have benefited from during the most recently ended quarter. Just as many of our gardens have literally bloomed during the Spring, so too have our portfolios figuratively bloomed, producing solid double-digit gains. As the Summer has worn on, the Scheffler gardens have stagnated: our dahlias, zinnias, garden balsam, and straw flowers have peaked, and new growth is replenishing flowers we have harvested. Yet, we know that late-season flowers have still to bloom, and for the time being, the fireworks in our backyard have slowed to more of a sparkle. So too have the equities markets, as yields have stagnated for the time being as we await new growth going into the fourth quarter. For the time being, we are enjoying the substantial growth we’ve been positioned to experience, and we stand ready to harvest if we must, and to stand pat if we are able.
THE ECONOMY
A far weaker-than-expected reading on consumer confidence for July sent stocks reeling at midmorning last Tuesday, disappointing investors hoping for signs of a pickup in the key economic indicator. The Conference Board said its July consumer confidence index fell to a reading of 76.6 from 83.5 in June. Economists surveyed by Reuters were expecting it to rise to 85.0. The news was a blow to investors hoping for signs that the economic recovery is on track. Stocks have been essentially rangebound for the last four weeks as investors have been waiting for economic and corporate news that is sufficient to justify the four-month rally. While last week’s reports on weekly jobless claims and durable goods orders seemed to suggest a pickup, the consumer confidence report seemed to throw a monkey wrench into such hopes.
Likewise, U.S. employers cut thousands of jobs in July defying expectations that payrolls would grow; however, a decline in the labor force sent the unemployment rate down. The jobless rate fell to 6.2 percent from 6.4 percent in June, the Labor Department said last Friday. Economists, on average, expected the rate to fall to 6.3 percent, according to a Reuters poll. But non-farm payrolls fell by 44,000 jobs, the report said, after losing a revised 72,000 jobs in June. Economists, on average, expected payrolls to grow by 18,000 jobs. The two numbers moved in opposite directions because they are generated by separate surveys, and the unemployment rate fell mostly because the size of the labor force — the number of working-age people either working or looking for work — shrank by 556,000 people in July. This statistic reflects growing frustration on the part of laid off workers discontinuing their search for work in an increasingly difficult job market.
Lastly, U.S. manufacturing activity expanded for the first time in five months in July, the nation’s purchasing managers said Friday, matching Wall Street forecasts. The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 51.8 from 49.8 in June. Any number below 50 indicates contraction in the sector. Economists, on average, expected the ISM index to rise to 51.8.
