THE MARKETS
Fed Chairman Alan Greenspan’s congressional testimony on the state of Social Security, coupled with a lousy job report left stocks mixed last week as both the Dow Jones Industrial Average and the NASDAQ managed to record modest gains for the week. The Dow’s 94-point advance on Monday was all but wiped out the following day as Greenspan’s comments raised the specter of higher interest rates. Tuesday’s 86 point decline was the sharpest drop since January. Initial weakness developed on Friday with the release of the February job report, which showed a paltry addition of 21,000 workers for the month, far short of the 125,000 estimate. But a late rally lifted the Dow into positive ground as it gained 12 points for the week (+0.11%) and settled at 10595.
The NASDAQ, which had been down for the last six weeks, managed to post a modest gain for the period as selling in the tech stocks slowed. For the week, the NASDAQ gained 18 points (+0.89%) and closed at 2047.
Martha Stewart’s conviction Friday on conspiracy, obstruction of justice and other charges grabbed much of the media’s attention. Failing to receive necessary coverage was Alan Greenspan’s call for later social security retirement ages and reduced retirement benefits as a result of current budget deficits and the impending baby-boomer retirement wave. For the week ending March 4th, U.S. equity mutual funds had inflows of $3.9 billion compared to inflows of $2.5 billion the previous week. Mutual fund inflows for January were the 3rd highest ever at $43.8 billion according to the Investment Company Institute. The previous monthly highs occurred at the peak of the bubble, January and February 2000.
THE COMPASS PORTFOLIOS
As the market advance has waned, we have become increasingly cautious and defensive going into the one-year anniversary of the invasion of Iraq. The bull market run of 2003 began in late march of last year, and the upward move in the markets has been substantial. Yet, the name of the game is ‘valuation,’ and for stock prices to be sustained will require an extension of the good news reported last year. That being said, much of the good news of an economic recovery has been priced into the markets, and institutional investors (whose actions determine much of the market’s fluctuations) are already beginning to price in 2005’s anticipated earnings. Sentiment, momentum and strength indicators have all turned neutral from bullish over the past few weeks, and we believe a prudent allocation reflects a more defensive posture. We currently utilize a targeted asset allocation of 70% equities, 0% fixed income and 30% money market securities.
THE ECONOMY
U.S. payrolls grew in February at a far slower pace than the prior month, the government said Friday, in a report that disappointed Wall Street expectations for the fourth month in a row. Payrolls outside the farm sector grew by just 21,000 jobs in February, the Labor Department reported, compared with a downwardly revised gain of 97,000 in January. The unemployment rate held steady at 5.6 percent.
Domestic machine tool demand for January soared above its year-earlier levels but fell sharply from December, two industry trade groups said in a joint report released Sunday. The American Machine Tool Distributors’ Association and the Association for Manufacturing Technology said U.S. January machine tool demand jumped to $161.19 million, up 19.4 percent from $135.04 million in January 2003. But January demand fell 23.9 percent from $211.71 million in December.
New orders at U.S. factories dipped in January, the Commerce Department said Thursday, as demand for long-lasting durable items was revised lower. The Commerce Department said factory orders fell 0.5 percent in January, in line with Wall Street expectations and their first drop since November. December factory orders were revised up to a 1.8 percent gain from the initially reported 1.1 percent increase. Demand for durable goods — those meant to last for three or more years — fell 2.3 percent in January, led by a sharp decline in transportation-related orders. In its initial report on durable goods released last week, the Commerce Department had said orders dropped a smaller 1.8 percent.
