As the “wave of steel” rumbled towards Baghdad, the bulls celebrated with a blistering eight-day rally. Prospects of a quick end to the war, falling oil prices and a stronger dollar all contributed to the rally that has carried the Dow Jones Industrial Average up over 12% since it bottomed last a week ago Wednesday. For the week, the Dow gained 663 points (+8.44%) and closed at 8521. The tech heavy NASDAQ gained 81 points (+6.84%) and finished at 1421.
The percentage of bullish investment advisors reversed to a neutral 46.6% up from a bullish 39.8% reading the previous week. For a change, equity mutual funds had cash inflows totaling $2.1 billion for the period ending March 19, 2003 compared to outflows of $3.0 billion the previous week. This was only the second time in the last eight weeks that equity funds had positive cash inflows.
To be certain, the week ahead will see the markets reflecting the progress of the war. Advances into Baghdad will certainly translate into market advances, and any formidable resistance will certainly spook investors into quickly selling positions. Modern warfare relies on information, and the scores of reporters embedded with coalition troops will relay stories of progress and pullbacks, translating immediately into market progress and pullbacks, at times severe. When the war’s objectives have been met, the markets will be forced to focus once again on domestic issues such as corporate profits and budget deficits, and the upcoming earnings season may once again prove disappointing.
THE COMPASS PORTFOLIOS
We have acted upon several upgrades over the past week by adding to index positions, mainly among the large-cap variety (value, growth and blend). Portfolios are generally participating in 70-80% of the market’s appreciation, a suitable and prudent posture given the uncertainty of the Iraqi war. The markets promise to be volatile, and balancing risk with potential reward will certainly be a top priority and a challenge.
After the significant upward move experienced last week, investors should prepare for an inevitable round of profit-taking. While there is nothing “normal” to the market activity of the past three weeks (as war IS and certainly SHOULD BE an abnormal event), markets often respond with violent and sudden moves, both up and down. Sustainable trends manifest themselves over time, and short-term corrections should be looked upon as a normal event, but not yet trend reversing. So what is the current trend? Clearly still down, with the move in the past three weeks an upward correction in a painfully long bear market.
During their regular meeting last week, Alan Greenspan’s Federal Reserve Open Market Committee decided to hold the line on rates until geopolitical concerns ease. Indeed, the future is so fuzzy, it even punted on its usual risk assessment. At least part of the policy statement issued by the Federal Open Market Committee, the Federal Reserve’s rate-setting arm, ran according to expectations at the close of its Mar. 18 meeting. The bottom line: The Fed sees no reason to ease now, given current expectations for improvement in the U.S. economy later in the year as geopolitical uncertainties dissipate. Yet the Fed signaled that it stands ready to ease if unfavorable geopolitical developments warrant such a move.
The Iraqi War has resulted in a significant deterioration in oil prices. After topping out at $39.99 per barrel, raw crude has dropped to below $30 per barrel in just over ten trading days. While gas prices haven’t seen the same drop as raw crude, falling energy prices should act as a stimulus when they eventually work their way through the system.