The Dow Jones Industrial Average remained locked in a 186 point trading range last week as closing values fluctuated between 9096 and 9284. On Thursday, the Dow flirted with the June high as it topped 9280 early on before it reversed course giving up 81.73 points to close at 9106.42. For the period, the Dow gained 96 points (+1.0%) and closed at 9284. It was the same story over at the NASDAQ, which gained 22 points (+1.3%) for the week and settled at 1730. For the year the NASDAQ is up over 29% while the Dow has gained more than 11%.
All of the strength and momentum indicators we track are currently in neutral territory, suggesting a continuation of the current trading range. For the week ending July 23rd, U.S. equity mutual fund inflows were a healthy $3.2 billion compared to inflows of $852 million the previous week
THE COMPASS PORTFOLIOS
No changes to our current models during the previous week. We are continuing to slowly restore positions reduced as several indicators broke through support levels, and we continue to favor equities while reducing positions in fixed income instruments.
Are the U.S. equity markets now in an “all or nothing” position? The interest rate reductions enacted by the Federal Reserve and President Bush’s series of tax cuts have so far done little to stimulate the U.S. economy. And while the equities markets have benefited form the official end of hostilities in Iraq, much of the markets’ gains for the year have not yet been justified by better corporate earnings. Under the “all or nothing” scenario the economy may currently be in, there seems to be little room for error. If the government’s policy of low interest rates combined with deep tax cuts works, the U.S. economy will rebound sharply, in turn producing more jobs and creating an environment for continued consumer spending. Higher stock prices would likely follow, and be both sustainable and substantial. However, if low interest rates and tax cuts continue to produce few meaningful results, additional measures available to avert large-scale financial contraction may not be available. It is very unlikely that further interest rate cuts (already at 45 year lows) will be able to produce the results that thirteen previous rate cuts couldn’t. Furthermore, additional tax cuts are unlikely given the significant deficits that both the federal and state governments are currently experiencing. Given these challenges, the Compass Wealth Management process offers an effective way of addressing them, beginning with meaningful investment risk management.
Several sources reported better economic news all around last week, demonstrating stability but not full economic recovery as of yet.
New orders for costly manufactured goods shot up at the fastest rate in five months during June, led by a surge in demand for new aircraft and cars, the Commerce Department said Friday. Orders for long-lasting durable goods climbed 2.1 percent to a seasonally adjusted $172.5 billion last month after being flat in May — a surprisingly robust pickup that surpassed Wall Street economists’ forecasts for a 1.0 percent increase and implied a recovering industrial sector that could help push a faster pace of second-half economic expansion. The June increase was the strongest since a matching 2.1 percent rise in orders in January.
Furthermore, the number of Americans filing new claims for unemployment benefits sank to the lowest level since February, the government said Thursday in a report showing surprising strength in the nation’s long-depressed job market. The number of initial claims for state jobless benefits tumbled 29,000 to 386,000 last week from a revised 415,000 the prior week, the Labor Department said. The number was well below Wall Street forecasts for 413,000 claims, and the lowest since the week of Feb. 8, the department said. It was also the first time since then that new claims were below 400,000, a level viewed by economists as the sign of a soft job market. Claims had been above 400,000 for 22 straight weeks.
Lastly, consumer confidence leveled off after a four-point slide since mid-June but still on pace for its worst annual performance in a decade. The ABC News/Money magazine Consumer Comfort Index, based on public views of current economic conditions, stands at -21 on its scale of positive-100 to negative-100, for a second consecutive week, well off its -9 average. Twenty-eight percent of Americans rate the nation’s economy as excellent or good, up modestly from 27 percent the previous week. Lingering pessimism about the economy, however, persists; 30 percent of respondents rated the economy as poor, the same as last week. The lowest level of confidence in this category was set at 7 percent in late 1991 and early 1992. The number of respondents who say that their own finances are in good shape inched down 2 percentage points from the prior week’s 54 percent to match this year’s 52 percent low. But that is still well above the category’s 42 percent low set in March 1993.