The New Year started with a “bang” as buyers put aside geopolitical worries and piled into the market. On Thursday, the Dow Jones Industrial Average gained 265.89 points (+3.2%) for one of the biggest opening days on record. Although volume was moderate, the advance was broad based as the New York Stock Exchange had 2547 advances vs. 726 declines. For the week, the Dow gained 298 points and closed at 8601 (+3.6%). The NASDAQ also bounced back gaining 39 points (+2.9%) for the week and finishing at 1387.
In a continuation of the “no trend” trend, U.S. equity mutual funds had outflows totaling $4.5 billion for the period ending December 31st, compared to inflows of $3.6 billion the previous week. The percentage of bullish investment advisors is now neutral at 48.3% down from 49.4%. Readings at 54% or higher are considered bearish.
I’d like to start the new year with a look back at the last period of time in which the markets ended a three-year slide: 1939-1941. The last three-year collapse in stocks ended in 1941 when the U.S., not yet a global power, was already at war. Although the war drums now are sounding loudly, there remains a chance, albeit slight, that military action can be avoided. On the domestic front, both unemployment and inflation hovered just below 10% in 1941 vs. 6% and 2.2%, respectively, at the end of 2002. Despite a plethora of domestic and foreign woes at the start of World War II, the S&P 500 gained more than 12% in 1942.
Looking ahead to 2003, I believe it is likely that a more normalized investment climate will emerge, fueled by better corporate governance, greater domestic security, low interest rates and improved capital spending by corporations. President Bush will unveil his fiscal stimulus package this Tuesday, and investors should expect a decrease or the complete elimination of tax on dividends, among other measures.
THE COMPASS PORTFOLIOS
For the fourth week in a row, there have been no changes to our model portfolios, and so no significant changes to our clients’ accounts. In reviewing the most recent quarter, clients will notice slight gains in their portfolios, a welcome respite from the manageable losses experienced during the previous two quarters. Because The Compass Wealth Management system is a trend following system as opposed to a trend setting system, our portfolio changes will almost always come after a market bottom has been made. This was the case during the fourth quarter, which has allowed us to reposition client assets to reflect a more fully invested posture. All models currently prescribe allocating capital to the markets at this time, and so our clients are positioned favorably to take advantage of future gains. If the trend should change, we stand ready to take the appropriate steps to protect client assets. For now, it appears that some traction and progress can be made through careful and selective allocations.
On Thursday, the Purchasing Managers’ Index (PMI) reported a reading of 54.7 versus the 50.0 forecast per Dow Jones Newswires. November was unrevised at 49.2. Expanding conditions are indicated by readings above 50. The PMI for December (54.7) corresponds to a 4.4 percent increase in GDP, ahead of the previous estimates for 3.5% growth. The report reinforces our view of a moderate and protracted recovery. While one month does not make a trend, the surprising jump in the composite index is obviously a welcome sight.
The Department of Commerce reported a 0.3% increase in the level of new construction put in place during November, much larger than expectations. To no one’s surprise, this increase came off the heels of an incredibly low interest rate environment. And given the recent report of even lower rates last month, it is possible that construction expenditures increased even more during December. Still, economists generally anticipate little contribution by residential investment in 2003, as rates have probably bottomed, and mortgage refinancing has peaked.