THE MARKETS
Back-to-back triple digit losses sent the Dow Jones Industrial Average down to levels not seen since mid-December 2003 as the majority of the major averages saw their yearly gains all but wiped out. The first round of carnage occurred on Wednesday as the Dow lost 160.07 points (-1.53%). Thursday was more of the same as that average lost 168.51 points (-1.64%) and closed at 10128.38, down over 5% from its recent high, 10737.70 recorded on February 11th. A rally attempt on Friday failed to lift the Dow into positive ground as it lost 355 points (-3.35%) for the week and settled at 10240.
The NASDAQ, which had been down for six of the last seven weeks, also took it on the chin as tech stocks continued to get hit. For the week, the NASDAQ lost 63 points (-3.08%) and closed at 1984. For the year, the Dow is down 2.00% while the NASDAQ has lost less than 1% of its value.
Momentum, strength and sentiment indicators are all neutral to bearish at the current time. Institutional support for equities has waned over the past five weeks, and is reflective of softening equity prices and greater concern over post-2003 valuations. The next level of support for the Dow Jones Industrial Average is just below the psychologically important 10,000 level, and sits at 1900 for the NASDAQ composite.
Lastly, mutual fund inflows continue to be impressive despite the weakness with an additional $3.3 billion added for the week ending March 10th.
THE COMPASS PORTFOLIOS
The reduced equity exposure we carried into last week has helped significantly. We came into the week with a reduced position in most market segments, and further trimmed back positions during the week. As of early Monday morning, most portfolios now carry a 40% – 50% defensive position, which in-turn reduces market participation (both to the downside and to the upside). Determining how much risk to expose our clients to is at the heart of our wealth management process, and prudently reducing or increasing exposure to the markets in a disciplined fashion is what we do best! The flexibility we have built into our portfolios benefits our clients during periods of market weakness (we tend to lose less) and benefits our clients during periods of market strength (we tend to participate significantly). Should the market weakness continue, we stand ready to further reduce positions.
At the expense of our economic commentary this week, I’d like to take a moment to share my insight on the effect of the bombings in Spain late last week: Loss-of-life notwithstanding, the immediate impact of the bombings led directly to regime change in the Spanish parliament – the ouster of the conservative party which backed the United States in the Iraq war by the liberal socialist party (which is pledging to remove its troops from Iraq in June). The political impact to the markets is worth noting: if al Qaeda or a loyal faction was indeed behind the bombings, the electoral outcome can be interpreted as a vote against the Spanish leadership and their support of the United States. Several in our own Congress have publicly lamented the political destabilization of our allies around the globe as a result of the lack of a truly global coalition. The economic fallout of less stable economies could be severe, or at the very least could require additional capital and influence to appease unstable leaders. Either way, further deterioration of cooperative efforts by our allies is undesirable to say the least, and will need to be monitored closely.
THE ECONOMY
Federal Reserve policy-makers are unlikely to move on monetary policy at their meeting this week, giving interest rates room to stay low and bond prices room to stay high. The central bank’s policy-makers are scheduled to meet Tuesday to discuss the economy and their target for the federal funds rate, an overnight bank lending rate that influences many prime lending rates. Few economists expect the Fed will change its target for the fed funds rate from 1%, the lowest level in more than 40 years. Many economists also believe the Fed will leave unchanged the two-paragraph statement announcing its decision, which analysts scrutinize for clues about Fed expectations for economic growth, inflation and future policy moves.
Strong automobile sales pushed total retail sales higher in February, the government said Thursday, but sales aside from autos came in much weaker than Wall Street forecasts. Though many economists doubted consumer spending was about to fall off the table, the disappointing number excluding auto sales followed several recent signs of sagging consumer confidence, raising some questions about the strength of the broader economy. The Commerce Department said retail sales rose 0.6% to $327.2 billion last month after rising a revised 0.2% in January. But excluding autos — which account for about a quarter of total sales and can fluctuate widely from month to month — sales were unchanged at $249.8 billion after rising a revised 1.2% in January.
