Despite a slew of negative news, the market continued to plow ahead last week as the Dow Jones Industrial Average finished up for the third week in a row. The Dow has gained over 800 points (+9.5%) since April 25th, and has finished higher for six of the last seven weeks. As of the close on June 12th, the Dow was at its highest level since July of 2002 when the average last closed above 9200. For the week, the Dow gained 55 points (+0.6%) and closed at 9117. The close over 9053 on June 6th triggered a Dow Theory buy signal suggesting that a long-term, sustained upside move is in the cards. The NASDAQ failed to finish in the plus column as it lost 1 point (-0.06%) to close at 1626.
For the week ending June 11th, U.S. equity mutual fund inflows were $2.0 billion compared to inflows of $1.5 billion the previous week. Momentum has slowed slightly, and sentiment has recently become more neutral, suggesting a round of profit taking may yet occur.
THE COMPASS PORTFOLIOS
No changes to our model portfolios during the most recent week, and so we remain fully invested at the present time. The markets continue to be overbought, with no significant pullback since the last market comment was published. Consolidation would be healthy, as the perception of an improving economy needs to be justified by solid data to support the recent market advance. Should the economy (and the data) falter, much of the recent run would be at peril, and portfolio adjustments would be necessary.
A recent CNN/fn article on the 13-year bear market in Japan highlighted an astounding fact: there have been four Nikkei rallies of 32% of more during the 13-year bear market, all which have dissolved and have led to further declines. Amid the carnage, the Bank of Japan lowered key interest rates to near zero, and the Ministry of Finance took steps to significantly devalue the Yen (much of the same steps taken by our government). While there are many arguments that the Japanese economy has always been substantively different from the United States, the Japanese brain trust certainly didn’t engineer their country’s financial collapse, just as no government ever does. However, history does caution us to learn from the failures of other economies, and Alan Greenspan and the Federal Reserve have initiated dialogues to do everything possible to avert such a disaster here.
With this in mind, we continue to believe there are two critical tasks every wealth manager is charged with: (1) effectively managing investment risk, and (2) positioning our clients properly for the market we are currently facing. Should the Fed’s fear of a long-term cycle of deflation come to fruition, we stand ready to take appropriate action once again, protecting the recent gains and continuing the fine balance between risk and reward. The most recent run in the markets has certainly been fun, but it is important to take it in the context of a larger economic backdrop and to be prepared to take further action if it becomes warranted.
U.S. stock markets sold off early Friday following the release of a much weaker than expected reading on consumer sentiment by the University of Michigan. The report, a preliminary reading on consumer sentiment for June, showed the University’s index dropping to 87.2 this month from May’s 92.1 reading. Economists surveyed by Reuters had expected the index to nudge up to 93.4 in June.
U.S. wholesale prices fell again in May following April’s record drop, the government said Friday, news that was unlikely to soothe worries about deflation — though the report contained some hopeful signs. The Labor Department said its producer price index (PPI), a measure of wholesale prices, fell 0.3 percent following April’s 1.9 percent decline, which was the biggest on record. But the so-called core PPI, which excludes often volatile food and energy prices, rose 0.1 percent after falling 0.9 percent in April. Economists, on average, expected PPI to fall 0.2 percent and core PPI to rise 0.1 percent, according to a Reuters poll.
Lastly, fiscal stimulus, in the form of the latest tax cut, should begin to be felt in July as employees see the effects of lower income tax withholding rates and many parents receive checks reflecting the increased child tax credit. Overall, the tax cut should boost real growth in U.S. gross domestic product to above 4% for several quarters, says Standard & Poor’s chief economist David Wyss.