The Markets
The recent rally in equities continues to stall amid year-end complacency, indications of a less active Federal Reserve in 2006, and a housing market that continues to add new units. 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 eleven of the last sixteen trading days. For the week ending December 16, the blue chips gained 97 points (+0.90%), snapping a two week losing streak, however and closing at 10875.
The NASDAQ, now near levels not seen since the summer of 2001, has experienced similar fatigue as the index also gave up ground over the past two weeks. For the week, the NASDAQ lost 4 points (-0.19%) closing at 2252.
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 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
The Federal Reserve raised rates again last week, but indicated that if warranted their campaign of consecutive rate hikes may finally be interrupted. During the penultimate meeting with Alan Greenspan at the helm, the Fed left open the possibility that if inflation continues to be contained and if the housing market begins to slow, the long sought after “neutral” rate may have been achieved. If the campaign is indeed put on hold, one significant hurdle will have been overcome, clearing the way for renewed buying interest in equities.
U.S. producer prices fell 0.7% last month, the biggest drop in 2-1/2 years, according to a government report issued this morning. The drop in the producer price index was the largest since April 2003 and reflected a 4% drop in energy costs, which offset a 0.5% gain in food prices, the Labor Department said. The so-called core PPI, which strips out those volatile costs to provide a better gauge of underlying inflation pressures, edged up just 0.1%. Wall Street economists had expected overall producer prices to drop 0.5%, with the core index up 0.2%.
