Despite a slew of spectacular earnings reports, rising inflation fears sent stocks lower as both the Dow Jones Industrial Average and the NASDAQ ended the week in the red. On Tuesday, the Dow appeared to be on the verge of topping its recent highs recorded earlier in the month, as it pushed through 10537. But the rally failed as the index fell to 10441 before settling at 10478. The rest of the week saw more red as the Dow fell to 10219 on Thursday before bouncing back late in the day. For the week, the Dow lost 247 points (-2.36%) and closed at 10225.
The NASDAQ fared a lot worse as the tech stocks and especially the semiconductors took it on the chin. For the week, the NASDAQ lost 129 points (-6.29%) and closed at 1920. On Friday, the NASDAQ dropped below its 200-day simple moving average which stood at 1932. The next level of support is in the 1895 area which was the low recorded on March 24th. For the year, the Dow is down 2.20% while the NASDAQ is down 4.20%.
Geopolitical concerns, highlighted by the escalating violence against Americans in Iraq, Afghanistan and now Saudi Arabia have contributed to the market weakness. The Fed meets this week, which is expected to yield no change in interest rates but more clues as to the scope of future interest rate hikes. At the present time, it appears that the market is already pricing in a 0.75% rate hike (Fed Funds rate of 2.25%) by January of ’05.
THE COMPASS PORTFOLIOS
No changes to our neutral asset allocation model during the last week: A maximum 45% equity, 0% fixed income, 55% money market allocation. We continue to focus on this prudent asset allocation for the current “trading range.” A trading range exists when the markets continue to bounce between a short-term top and a short-term bottom. For the current market, the top of the range is approximately 1160 on the S&P 500 with the bottom of the range coming in at approximately 1105 (we currently stand at approximately 1107). A trading range creates a challenging environment for all investors, as many lose patience and try to outsmart the markets by taking on too much risk or by simply trying to do too much rather than continuing a disciplined wealth management regimen. We remain committed to our discipline, and I pledge our best efforts to remain prudently positioned as we continue to navigate the more challenging market environment.
The government released its first reading on U.S. gross domestic product, coming in at 4.2%, up slightly from a 4.1% growth rate in the fourth quarter, but below economists’ estimates of 5% growth, according to Briefing.com. Despite coming in below estimates, the GDP report showed the price index of gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2% in the first quarter, compared with an increase of 1.3% in the fourth quarter. It marked the highest rate of increase in that measure since the first quarter of 2001.
In separate reports, the employment cost index came in at 1.1% in the first quarter, above forecasts for a 0.9% increase. The ECI came in at 0.8% rise in the fourth quarter. The weekly report on jobless claims was also released Thursday, coming in at 338,000, below a revised 356,000 the previous week and below estimates of 343,000, according to Briefing.com.
In related news, the trend of shifting jobs to cheaper locations overseas is a global phenomenon and any ban on outsourcing could have negative effects, the U.S. ambassador to India said Wednesday. Lawrence University graduate and Ambassador to India David C. Mulford told a business gathering in India’s financial capital, Bombay, that there were strong economic incentives to outsource. “Governments and American taxpayers will gradually figure out that if they want to pass an outsourcing ban in their communities, then they are going to subsidize jobs and pay higher taxes and there will be fewer jobs in the future,” he said. Research group Global Insight said in a study last month that while 104,000 U.S. jobs were lost because of offshore outsourcing between 2000 and 2003 — some 35,000 a year — more than 90,000 U.S. jobs were created last year due to the cost savings reaped by employers who sent IT work overseas.
Lastly, a key regional reading on manufacturing Friday showed an improvement that was better than Wall Street expectations. The Chicago purchasing managers’ index, a report from area manufacturers rose to 63.9 from 57.6 in March. Economists surveyed by Briefing.com forecast the overall index would rise to 61. Any reading on the index or its component parts above 50 indicates growth. The employment part of the index crossed that 50 threshold in April, coming in at 51.5 compared to 49.0 in March. This indicates good progress. Other parts of the index showed strong growth across many key measures. Production and new orders continued to expand, as did order backlog and inventories. The one area of concern for investors could be the prices paid index, which edged up to 76.1 from 75.7 in February.