Fears of a war with Iraq, a sagging dollar, and weak economic data set the stage for Friday’s 111-point pullback. This drop in the market took the Dow back below its 50-day simple moving average as both the Dow Jones Industrial Average and NASDAQ recorded their lowest closes of 2003. For the week, the Dow lost 198 points and closed at 8586 (-2.25%). The NASDAQ, socked by poor earnings outlooks from several tech companies, lost 71 points (-4.91%) for the week and finished at 1376.
Microsoft, which beat fourth-quarter earnings estimates, declared it’s first-ever dividend, and announced a 2-for-1 stock split. Despite the positive factors in Microsoft’s earnings report, the weaker sales guidance created concern that 2003 may still be a sluggish year for corporate tech spending.
Early guidance given by several corporations indicate that last quarter’s earnings growth rate won’t be sustained in the early stages of 2003. Even as First Call’s fourth-quarter earnings estimates for companies in the S&P 500 index actually nudged up last week, analysts were slashing estimates for the first and second quarters. They now predict earnings growth of 11.3% for the first quarter year-over-year and 10.4% for the second, and the actual numbers are likely to be lower. Not bad growth, but the higher growth rate was already factored into the market, and now may need to be taken back a bit.
There’s little mystery as to why earnings growth is hitting a soft spot. Earnings tend to shadow gross domestic product, and economic growth slowed in the fourth quarter, prompting the Federal Reserve to slash interest rates in early November. Geopolitical risks continue to loom, holding back corporate spending. Companies face rising costs from insurance, pension liabilities (such as General Motors and Ford), higher energy costs, and restructuring charges. A meaningful jump in capital spending, which would propel tech and industrial earnings, isn’t expected until the second half of 2003.
THE COMPASS PORTFOLIOS
No changes to our model portfolios again this week. Each of the indexes we monitor are experiencing mildly deteriorating conditions, which means that each has given up a bit of the progress made during the first two weeks of 2003. Our disciplined approach in large part measures institutional support for the indexes we track, all of which currently show adequate support to warrant continued investment. However, if support begins to show stronger deterioration, we will take appropriate steps to reduce invested positions, protecting our clients’ assets from further weakness.
New U.S. claims for unemployment benefits unexpectedly fell to their lowest level since November in the week ended Jan. 11, the Labor Department said Thursday. Claims dipped by 32,000 to a seasonally adjusted 360,000 in the week, down from a revised 392,000 in the prior week. The level was much lower than Wall Street economists had been expecting but a Labor analyst warned that adjustments intended to deal with seasonal fluctuations in claims may have had a downward impact on the numbers.
Separately, the government said the Consumer Price Index for December rose 0.1%, a bit weaker than the increase of 0.2% many economists had expected. The index posted a 0.1% rise in November. Excluding food and energy, consumer prices rose 0.1%, in-line with analyst expectations.
U.S. industrial output fell in December, the Federal Reserve said Friday, surprising economists who expected a modest gain. Industrial production fell 0.2 percent last month after rising 0.1% in November, according to the Fed, which also said factories, mines and utilities ran at 75.4% of capacity in the month, compared with 75.6% in November. Economists, on average, expected production to rise 0.2% and capacity use of 75.7%, according to Briefing.com.