THE MARKETS
Stocks were mixed last week as all eyes were on the Treasury market, which had the worst weekly showing since March. Second quarter earnings reports were also mixed, as technology and telecommunication stocks such as IBM and Nokia were weak while Old Economy issues such as Caterpillar, Coca Cola and United Technologies showed some strength. For the period, the Dow Jones Industrial Average gained 69 points (+0.7%) and closed at 9188. The high flying NASDAQ, which lost 49 points on Thursday gave up 25 points for the week (-1.4%) and settled at 1708. Thursday’s slide was the second largest NASDAQ point loss of the year. For the year the NASDAQ is up over 28% while the Dow has gained more than 9%.
For the week ending July 16th, U.S. equity mutual fund inflows slowed to $852 million compared to inflows of $2.4 billion the previous week. Investor sentiment, momentum and strength indicators are all neutral at the current time, and reflect a large degree of complacency that has permeated the markets.
THE COMPASS PORTFOLIOS
The complacency present in the current market is beginning to be reflected in our portfolio models; however, little action has as yet been prescribed. We continue to hold significant positions in all equity areas, a diminished position in fixed income instruments, and a modest amount of cash. Most model components are beginning to reflect the summer malaise, as many are nearing “neutral” status. The summer months tend to reflect institutional complacency as portfolio managers are reluctant to take significant action, and this lack of commitment typically results in slightly lower equity prices. As long as the weakness remains subdued, little action will be required, and we will be able to focus on future earnings and economic data.
THE ECONOMY
The number of Americans filing for unemployment benefits for the first time fell sharply last week from their highest level in more than 20 years, the government said Thursday, as the labor market struggled to end a prolonged downturn. The Labor Department said the number of Americans filing new claims for unemployment benefits fell to 412,000 in the week ended July 12 from a revised 441,000 the prior week. Economists, on average, expected 425,000 new claims, according to a Reuters poll.
In a report showing inflation remains a distant threat to the world’s largest economy, the government reported that U.S. consumer prices posted a slight gain in June. The consumer price index, a broad measure of retail prices, rose 0.2 percent after showing no change in May, according to a Labor Department report. The so-called “core-CPI,” which excludes volatile food and energy prices, was unchanged after rising 0.3 percent in May. Economists, on average, expected CPI to rise 0.2 percent and core CPI to rise 0.1 percent, according to a Reuters poll. The 12-month change in the core CPI was just 1.5 percent, matching the weakest year-over-year change in core consumer inflation since 1966.
A closely watched measure of consumer confidence in the United States rose slightly in July, according to a published report Friday, which hinted that consumers, the backbone of the world’s largest economy, are worried about a prolonged slump in the labor market. The University of Michigan’s consumer sentiment index rose to 90.3 from 89.7 in June, according to market sources quoted by Reuters. Economists, on average, expected a reading of 90, according to a Reuters poll.
The “current conditions” component of the index, which measures how consumers feel about their present situation, rose to 102.8 from 94.7, Reuters said. But the “expectations” component of the index, which measures how consumers think the economy will perform in the next 12 months, fell to 82.7 from 86.4 in June, according to the report.
