THE MARKETS
The market took off on Friday following a cautious week of trading as the March employment report posted the strongest growth rate in four years. All of the major indexes posted significant gains for the period as Friday’s rally pushed the Dow Jones Industrial Average over 10400 for the first time since March 9th. For the week, the Dow gained 258 points (+2.52%) and settled at 10470.
The NASDAQ, led by high-tech stocks, also scored impressive gains as the index crossed back over the 2000 mark. On a percentage basis, the NASDAQ outperformed the Dow by almost a 2:1 ratio. For the week, the NASDAQ gained an impressive 97 points (+4.95%) and closed at 2057.
The markets responded favorably to newly released jobs data on Friday morning which showed that a remarkable 308,000 new jobs were created during March. Equally impressive were the substantial upward revisions with new jobs coming in 64% higher than initially reported for January and a whopping 219% higher than originally reported for February. These significant misses by the Labor Department estimators originally made it appear that the jobs market was substantially weaker than it really was, which in turn led the markets to be priced inefficiently (see The Economy below for more).
Changes in the makeup of the Dow were also announced last week. Out are AT&T, Eastman Kodak and International Paper Corporation. In are Pfizer, American International Group and Verizon Communications. These are the first changes to the Dow since 1999 and are intended to reflect the 30 strongest and influential companies in the U.S. economy.
THE COMPASS PORTFOLIOS
As our wealth management process begins with managing the risk of long-term market declines (being concerned first with the return of a client’s assets) we systematically and in a disciplined fashion respond to market weakness by reducing client exposure to the equities markets. This discipline enables us to participate substantially participate in sustainable market advances while at the same time minimizing the damage of sustained market declines. Time-tested through both bull and bear markets, the process performs best under these conditions. However, sustained market moves are not always present, and trading ranges can (and do) develop from time to time that neutralizes even the best process. Few disciplines succeed in flat markets. Our cautious posture heading into the week has enabled us to protect client principal and the substantial gains of 2003, but also has meant that we a now a bit behind the markets at the start of the 2nd quarter.
Interestingly, this is exactly the same position we were in at the start of the 2nd quarter last year: a relatively flat 1st quarter, with the 2nd quarter starting off fast and our clients being perhaps positioned too defensively. We quickly caught up, however, and should the trading range be broken (either to the upside or to the downside) we stand ready to make the necessary adjustments to maintain a prudent asset allocation.
THE ECONOMY
By far, the most important piece of data released this year was Friday’s blockbuster payroll data. Though economists cautioned that one month does not a trend make, it was possibly the best economic news since the onset of the last recession in 2001, and a sign of spring for the nation’s labor market, which has been mired in its longest slump since 1939. Payrolls outside the farm sector grew by 308,000 jobs in March, the Labor Department said, compared with a revised gain of 46,000 in February. January’s payroll gain was also revised higher to a gain of 159,000 from a previously reported gain of only 97,000. The unemployment rate, which is generated by a separate survey, rose to 5.7 from 5.6 percent. These data are significant because corporations who strive to be efficient tend to hire additional workers only when necessary, leading market watchers to believe that the economy may be stronger than thought and in turn that first quarter earnings may be better than forecast.
Also of note, U.S. manufacturing activity accelerated in March, the nation’s purchasing managers said Thursday, beating Wall Street forecasts for a slight decline. The Institute for Supply Management (ISM) said its index of manufacturing activity rose to 62.5 last month from 61.4 in February. Economists, on average, expected an ISM index of 59.5, according to Briefing.com. A reading above 50 indicates expansion in manufacturing, and the index has been at or above that level since May 2003. The index has been above 60, a very strong number, since November.
