On the heels of Monday’s 202-point surge, the Dow Jones Industrial Average managed to finish in the plus column for the fourth week in row. Despite last Thursday’s 114-point decline, the Dow is up over 10% for the year and 22% from the March lows. Further evidence that this rally is the real thing has been the market’s ability to shrug off bad news. Such was the case again last week as Freddie Mac dropped a bomb with little overall negative effect. For the week, the Dow gained 83 points (+0.9%) and closed at 9200. The NASDAQ, up over 23% for the year added 19 points (+1.17%) to finish the week at 1645.
All eyes will be fixed on the Federal Reserve this week as Alan Greenspan and his Open Market Committee meet to determine what action, if any, should be taken on interest rates. With a record twelve rate cuts over the past three years having done little to spark the U.S. economy, an additional rate cut would be largely symbolic. Such a move would bring short-term rates to 50 year lows.
THE COMPASS PORTFOLIOS
No changes to our models again last week. While the recent run has continued to advance, it has been “two steps forward, one step back.” All models are currently positive; however, several components are close their respective “stop-loss” points, the price at which profits would be taken to preserve gains against future weakness. As last week’s market commentary indicated, significant rallies can manifest themselves within the context of a larger bear market, as has been the case in Japan during the past thirteen years. Rather than attempting to predict where the markets are likely to be in the future (a seemingly impossible task), the Compass Wealth Management Process seeks to position clients prudently for the market immediately ahead of us. This process allows our clients to be suitably offensive (when appropriate) and suitable defensive (when appropriate).
A key gauge meant to forecast economic activity posted its biggest gain in 17 months in May, a research group said Thursday, pointing to a possible pickup in the world’s largest economy in the months ahead. The Conference Board, a New York-based business research group, said its Index of Leading Economic Indicators rose 1 percent last month, the largest increase since December 2001. The index is designed to predict the economy’s direction in the next six to nine months or so. Topping Wall Street forecasts for an increase of 0.7 percent, the gain was due mostly to rising stock prices, growth in the money supply, and improved consumer confidence, the group said, though most other components of the index rose slightly.
According to a U.S. Treasury report issued last Thursday, the federal budget moved further into the red in May, posting a $90.45 billion shortfall that pushing the budget gap into record territory. In its monthly budget statement, the Treasury said the budget deficit through the first eight months of the budget year totaled $292.06 billion, up from the $145.38 billion in the same period last year and topping the record for an annual budget deficit. In 1992, the budget gap hit $290 billion, about equal to 4.7 percent of the size of the entire U.S. economy. The Congressional Budget Office earlier this month said it expected this year’s deficit to top $400 billion, close to about 4 percent of the economy’s size.
One significant result of the three-year mortgage refinance binge has been the “cash-out,” as homeowners have borrowed further against the equity of their homes to finance other spending. This spending has mainly taken the form of home improvements, as nearly $60 billion has found its way back into the economy. “Cash-outs” often happen during period when mortgages are refinanced as homeowners can simultaneously tap into their home’s equity and lower monthly payments. Should interest rates begin to rise, this source of consumer spending would be expected to decline.