The possibility of a long, drawn out war took its toll on the market last week as both the Dow Jones Industrial Average and the NASDAQ gave back a large chunk of their previous weeks gains. Trading was dictated by hourly headlines and rumors, which resulted in triple digit rallies and retreats. For the week, the Dow lost 376 points (-4.4%) and closed at 8145. The NASDAQ held up a bit better as it lost 52 points (-3.6%) and finished at 1369.
The percentage of bullish investment advisors remained neutral at 47.8% up from a neutral 46.6% reading the previous week. For the second week in a row (a real rarity), equity mutual funds had cash inflows. The week ending March 26th, totaled inflows of $1.6 billion compared to inflows of $2.1 billion the previous week.
As we discussed last week, the markets are likely to track the military’s advances and setbacks on Baghdad. For the time being, as goes the war, so goes the markets, with stagnation and stalemate being possible outcomes as well. President Bush’s request for $74.7 billion in war funding came at the expense of his proposed tax cut, which was cut by over half by the budget hawks of the republican-controlled senate. Long term, structural deficits are more likely to be detrimental to the economy than the proposed tax cuts are likely to be beneficial, and in due course look for the tax cuts to resurface (perhaps in time for the next election cycle?).
THE COMPASS PORTFOLIOS
No changes to our models during the past week. We continue to hold prudent positions in large-cap indexes such as the Dow Jones Industrial Average, the S&P 500, and the NASDAQ 100, along with exposure to high dividend paying indexes such as utilities and intermediate-term bonds. As the Gulf War II plays itself out, we are mindful of the backdrop of waning consumer confidence, a housing market that has likely run its course, and the ever-changing investor sentiment. We stand ready to make adjustments as necessary, including writing protective stop-loss orders should the war drag on or if a military setback occurs.
As today is the last day of the quarter, clients will be receiving their quarterly performance reports within the next ten days. Please also be on the lookout for invitations to our upcoming client appreciation day, Wednesday April 16th. Come join us as we celebrate our 1-year anniversary! Refreshments will be served from 8 a.m. to 8 p.m.!
President Bush’s $75 billion war-spending request — probably just the first one — could help set a deficit record, pressure Treasuries, and signal the end of the bull market in bonds. The prospect of military action against Iraq had been one of the main wild cards for the U.S. budget outlook. And now that the shooting has started — and Bush Administration announced on Mar. 25 that it’s seeking $74.7 billion to pay for the conflict and the war on terrorism — the risks to Uncle Sam’s pocketbook have come into sharper focus. Intermediate- and long-term interest rates are largely market driven, and if the risks to investors increase, higher interest rates will be necessary to offset that risk.
In other economic news, personal income for February rose by 0.3 percent, equal to January’s gain and ahead of the consensus expectation among economists surveyed by Briefing.com for a 0.2 percent gain. Spending was unchanged, compared with a 0.1 percent drop in January and expectations of a 0.2 percent loss.
New weekly claims for jobless benefits in the United States dropped last week, the government said Thursday, but stayed above a benchmark level indicating the labor market continued to suffer in a sluggish economy. The Labor Department said the number of Americans filing new claims for unemployment benefits fell to 402,000 in the week ended March 22 from a revised 427,000 the prior week. Economists, on average, expected 419,000 new claims, according to a Reuter’s poll. Any number above 400,000 generally is considered to indicate a deteriorating labor market.