The Markets
The recent rally in equities stalled for the second consecutive week as a surge in oil and natural gas prices along with evidence of a cooling housing market kept the year-end advance in check. The Dow Jones Industrial Average, which has run into strong resistance at it has approached the 11,000 mark at the end of November, has finished lower during seven of the last ten trading days. For the week, the Dow lost 99 points (-0.91%) and closed at 10778, its second losing week in a row.
The NASDAQ, now near levels not seen since the summer of 2001, saw similar deterioration as the index also gave up ground. For the period, the NASDAQ lost 17 points (-0.73%) closing at 2256 and snapping a seven week winning streak.
During the recent advance, inflows to the U.S. equity markets has been strong, a sign that capital is once again on the move, shifting from inflated markets such as real estate to more reasonably priced securities. For the week ending December 7, U.S. equity inflows were $2.3 billion compared to inflows of $3.7 billion for the previous week. The percentage of Bullish investment Advisors (a counter indicator) remains bearish at 56.2%, up from 55.8%. Readings over 55% are considered bearish, as most bullish investment advisors are assumed to be fully invested and cannot add additional assets to further fuel the advance.
The Appleton Group Portfolios™
No changes to our allocations over the past week. We continue to sport a more assertive asset allocation, triggered by strong inflows to the U.S. equity markets, and improved institutional support. Buying and selling pressure, a way of measuring whether the overall market environment is supportive or unsupportive, has gradually improved over the past month. At times over the past two months, the readings have reflected a genuine struggle between buyers and sellers, each nervous about either participating too much in the markets or not participating enough. Over a short period of time, our response to this data can (and often does) put us behind during any early-stage market advance. This is normal, it has happened repeatedly over our history, and it is likely to happen often in the future as well. Every wealth management discipline has its emotional costs, and the cost of managing the risk of sizable losses (resulting from a slowing housing market, energy at record highs, a 22% gain in planned layoffs, etc.) is that sometimes we are admittedly too conservative. If the market advance that we’ve seen (placing the markets mildly positive for the year) were to continue, our more assertive allocation can quickly catch up due to our position in growth stocks. As always, it’s the issue of producing gains with as little risk as necessary, working to preserve both invested capital and the gains that we’ve been able to produce over our history. As Will Rogers once said, “I’m not concerned with the return on my money, I’m concerned with the return OF my money.” The Economy
For the upcoming week, all eyes will be on whether the Federal Reserve’s policy statement will change, indicating an imminent end to the current round of tightening. It is a virtual certainty that the Fed will raise short-term interest rates yet again by 25 basis points, bringing the Fed Funds rate to 4.25%. It is unclear, however, whether Alan Greenspan’s committee will adjust the accompanying statement and drop the “measured pace” language, opening the door to a pause in their campaign. Expect no real effect if the language is changed; expect a bit of disappointment should the language remain the same.
Of greater importance, perhaps, is Thursday’s release of inflation data. Expect the core rate to show a gain of only 0.1%, indicating that inflation excluding food and energy is well contained. Should the reading come in higher, expect the Fed’s campaign of interest rate hikes to continue into the first quarter of 2006.
