Despite the markets coming too far, too fast, the bears were unable to muster any serious selling pressure as the markets finished the week in the plus column. Since the March 11 low, the Dow Jones Industrial Average is now up 15%. For the most recent week, the Dow gained 74 points (+0.86%) and closed at 8678. The NASDAQ gained 18 points for the week (+1.18%) and finished at 1538. Thursday was the NASDAQ’s highest close (1551.38) since June 2002.
The percentage of bullish investment advisors eased to 54.4% from a bearish 55.8% the previous week. That was the highest this contrarian indicator had been since March 2001, another sign that we’re nearing a short-term top. For the week ending 05/14/03 U.S. equity mutual fund outflows were $67 million compared to inflows of $1.1.billion the previous week.
Recent market moves have been fueled by the belief the economy may finally turn the corner in the second half of this year. With the Federal Reserve apparently on hold until at least September, interest rates appear to be steady, maintaining lows not seen since the Eisenhower administration. Recent headlines marking the possibility of deflation (rapidly shrinking prices for consumer goods) appear to be on the back burner for the time being, and corporate profits have seemingly stabilized.
The President’s tax cut plan has been sizably reduced from the $550 billion he had been seeking to the $350 billion preferred by Congress. The new tax plan does include a 3-year moratorium on taxes on corporate dividends, which should help investors owning utility, industrial and other “old economy” stocks.
THE COMPASS PORTFOLIOS
No changes again this week. While the momentum of the recent market advance appears to be waning, we continue to see higher portfolio valuations across the board. It is rare to see both the bond and stock markets heading in the same direction, as has been the case for the past two weeks. For the time being, all of our model portfolios are performing as expected, with large-cap growth and small-cap growth components leading the way. Not far behind are our managed income portfolio (now invested primarily in utilities) and our small-cap value portfolio, both of which are aided by the recent dividend-tax cut.
Our models currently prescribe invested positions; however, the markets are “overbought,” which means that the markets have advanced faster than is healthy. Investors should brace for a bit of profit-taking, as a normal breather would help institutional investors catch their breath after the recent run. As long as the trend of the markets and the institutional sentiment remain positive, we should be able to maintain our current allocations.
Strike two for President Bush’s top economic team. After a shakeup that ended in the ouster of Treasury Secretary Paul O’Neil, the President’s new advisor, John Snow seems to be at odds with the official White House policy of a strong dollar. Recent comments from Secretary Snow indicating his satisfaction with a weak dollar and a quick clarification from the White House sent the greenback plunging to four-year lows against both the Yen and the Euro. The weak dollar helps U.S. exporters (General Motors, General Electric, Dow Chemical, McDonalds to name a few), helping corporations who sell much of their goods overseas. However, it also makes it more expensive for U.S. consumers to buy goods produced in China, Japan, and greater Europe. The bond market is certainly looking for real economic leadership, and off-the-cuff commentary from senior government officials that appear at odds with official policy cannot help.
A light economic schedule this week may result in little real market activity. The government’s Index of Leading Economic Indicators is expected to show little change from the previous quarter, with slow steady growth continuing.