THE MARKETS
Despite Fridays 181 point sell off the market put in another productive week as the Dow ended in the plus column for the fifth week in a row. Of note was that on Thursday the Dow closed over the 9000 mark for the first time in six weeks. As of Thursday’s close, the DJIA was within 230 points of retracing 50% of the March – July 2002 decline. For the period the Dow Jones Industrial Average gained 94 points (+1.1%) and closed at 8872. The NASDAQ, led by tech stocks, fared about the same as it gained 19 points (+1.4%) and finished the week at 1380.
The growing consensus appears to be that stocks became oversold on the corruption scandals and fears of a faltering economy, and now present opportunities. The bulk of CEOs and CFOs have signed off on the financial statements pledge, and a relatively small number of companies were unable to sign. Moreover, the recovery has become slower but nonetheless appears to remain intact.
Stocks extended their gains Thursday, again advancing in the absence of substantive economic data or corporate news. The Dow Industrials closed above 9,000 for the first time since the early stages of the July sell-off (July 7, to be precise).
After a July in which miscreant after miscreant was identified, investors were perhaps gratified that the solidarity among Enron managers is crumbling. With Michael Kopper copping a plea, other informed insiders will likely follow, and Mssrs. Lay, Skillings, and Fastow seem much less likely to walk.
THE COMPASS PORTFOLIOS
Recent upgrades have proven beneficial, as we have seen modest and steady headway on the Dow, S&P 500 and the NASDAQ. Most managed portfolios now are sporting a 35-50% equity exposure, with the balance held among fixed income instruments and money market positions.
We believe the current asset mix is prudent, given the increasing evidence that large institutional investors are starting to invest their cash positions. Institutions (such as mutual funds, hedge funds and institutional money managers) generally maintain much smaller cash positions compared to our more flexible style. When institutions make a conscious decision to invest idle cash, equities tend to rise and the likelihood of further gains is high (buying tends to attract more buying). We respond to this activity by initially investing in those market segments getting the bulk of the cash, at this time large-cap stocks. If the trend continues to improve, we fill out the remainder of the position and closely monitor the markets for any change.
Our clients continue to benefit from our unique approach to investment risk management, and we remain vigilant against any change in sentiment or trend.
THE ECONOMY
Amid the latest wave of monthly economic data releases, it’s important to remember one thing: The feared slowdown in the U.S. economy remains a theory at this stage, not a fact. Sure, it’s becoming a more compelling theory to many on Wall Street. Stock prices remain low and volatile, sentiment indicators are weak, and surveys like the Institute of Supply Management manufacturing index reflect an overall perception of slowing by purchasing managers.
Take a look elsewhere, though. Government data on spending, income, and inventories indicate that growth in the third quarter will be fairly solid, following gyrations between the first and second quarters that reveal a fairly healthy growth rate of 3% for gross domestic product (GDP) in the first half of 2002.
Should investors believe perceptions or actual data? Though it’s dangerous to ignore the “animal spirits” that drive the economy, the markets should keep an eye on the hard economic numbers, where the picture is surprisingly upbeat.
