Fueled by prospects of the President’s economic-stimulus package, stocks produced the best three-day start to a new year ever as the Dow Jones Industrial Average registered a 5.18% gain. Volatility returned to the markets as three of the five trading days saw triple-digit moves for the Dow. For the week, the Dow gained 183 points and closed at 8784 (+2.13%). The NASDAQ also maintained momentum gaining 60 points (+4.33%) for the week and finishing at 1447.
The percentage of bullish investment advisors continues to slip, generally considered a positive sign for the markets going forward. It is currently a neutral 47.8% down from 48.3% last week and off considerably from the recent high of 51.1% recorded in early December. U.S. equity mutual funds had inflows totaling $2.1 billion for the period ending January 8th, 2003 as compared to outflows of $4.5 billion the previous week.
Many economists suspect that the total elimination of taxes on stock dividends as proposed by President Bush won’t survive in the final version of the new law. Nevertheless, some break will be offered, and that is likely to boost the 70% of stocks in the S&P 500 that now pay dividends. It could also encourage companies currently sitting on large piles of cash to return some to shareholders (such as Microsoft, Oracle and Intel).
While recent positive movement is welcome, the earnings preannouncement season is beginning, the time when corporations will often give analysts advanced warning if an earnings shortfall is anticipated. Many businesses have yet to see much growth in demand, and pricing power remains elusive. The weakness of the dollar against the euro could provide some cover as companies attempt to raise prices in the U.S. In addition, the declining dollar should improve the fortunes of U.S. exporters such as Proctor & Gamble, McDonalds, GE and many others.
THE COMPASS PORTFOLIOS
No changes to our portfolios this week. Our models continue to prescribe more heavily invested allocations, a prudent posture given the recently stronger level of institutional support and the likelihood of better corporate earnings. Most client portfolios have appreciated nicely over the past seven trading days, as our more fully invested positions are participating in the markets’ fast start.
The Appleton Group is pleased to announce three additional model portfolios, many of which have been used in client accounts and which will now be submitted to Morningstar’s Separate Account Manager’s database. The three additional portfolios are the Compass Classic – Russell 2000 Small Cap Value Portfolio, the Compass Classic – Russell 2000 Small Cap Value Portfolio and the Compass Classic – Managed Income Portfolio. The model portfolios will be ranked against their peers beginning in February of 2003.
The most significant data by far released by the U.S. Government last week was the Labor Report Summary released last Friday. Nonfarm payrolls lost a shocking 101,000 jobs versus the 30,000 job gain that was forecast per Dow Jones Newswires. November was revised down to a loss of 88,000 jobs from the reported loss of 40,000 jobs.
Unemployment remained unchanged at 6.0 percent, as expected. The previous months were unrevised leaving November at 6.0 percent and October at 5.7 percent. Average hourly earnings rose a nickel to $14.98 per hour, in line with estimates. The resulting 2.96 percent year-over-year rate is a touch higher than November’s 2.89 percent pace.
This report clearly indicates the employment “soft patch” carried over into December. Even though other aspects of the economy have been showing gradual improvement, employment traditionally is the slowest to respond. To see past this lagging indicator, the forward-looking Institute for Supply Management (ISM) surveys (manufacturing and non-manufacturing) can be useful. While both surveys fared better, they unfortunately each showed further contraction. Given the amount of excess capacity in the U.S. economy along with the strong pace of productivity growth, job creation may continue to be tepid in the months ahead. Therefore, overall employment conditions seem to be in a pattern that parallels our expectation of a moderate and protracted economic recovery.