THE MARKETS
After seeing the Dow slide to its lowest level of the year, traders rushed back into the blue chips sending the Dow once again back over the 10000 mark. The rally was impressive as the Dow posted triple digit gains on both Tuesday and Wednesday as New York Stock Exchange volume was the highest it’s been since mid-July. Both days saw advancing issues beat decliners by more than a 2:1 ratio. Also, this was the first back–to-back 100 plus point gains since May 2003. For the period, the Dow gained 270 points (+2.77%) and settled at 10027. The NASDAQ pushed higher for the second week in a row led by the tech stocks once again. For the week, the NASDAQ gained 59 points (+3.08%) and closed at 1974.
For the week ending October 27th, U.S. equity mutual funds had inflows of $1.2 billion compared to inflows the previous week of $212 million. The percentage of Bullish Investment Advisors is at a bearish 56.4% down slightly from 58.9% which was the highest it had been since the week ending March 5, 2004. Readings over 55% denote a bearish condition.
Needless to say, one of the market’s major obstacles will (perhaps) be cleared this week as the Presidential election is finally upon us. The battle for the White House will undoubtedly be a close one, with a host of possible outcomes presenting themselves on Wednesday morning. While the presidential outcome is quite uncertain, we believe that no matter who the victor is, the economic path which must be taken is clear: reduce government spending. In the post 911 world, it is understandable that great steps needed to be taken to ensure our renewed security. Right or wrong, the blank check written by our government has led to record budget shortfalls and significant deficit spending. While undoing many of the tax cuts initiated by the Bush administration over the past four years is a nonstarter, there are only two ways to trim these record deficits: grow our way out or sharply cut government spending. Growing our way out is perhaps the most beneficial, as renewed business growth will automatically boost tax revenue. Sharply cutting spending to offset the deficits of the past two years will prove more difficult unless operations in Iraq and Afghanistan are able to be curtailed OR the world community steps up to the plate and shares the burden of a free and democratic Middle-east. These are daunting challenges that will need to be addressed by whichever candidate wins.
THE COMPASS PORTFOLIOS
Participation in the market advance of the past week was significant. Our fully invested positions in all segments of the market led to average returns ranging from 2.2% to as high as 2.6%. ALL model portfolio components participated, including traditionally defensive segments such as our bond and utility components. Such a broad-based rally is quite unusual, but welcome, and could indicate a comfort on the part of the market as a whole with the likelihood of a successful resolution to the Presidential election. While there are numerous outcomes that could lead to no clear winner come Wednesday morning, the recent show of support for the markets means that either a victor is indeed likely or the possibility of no clear winner is already factored in.
It has been said (again and again) that the market dislikes uncertainty. While our portfolio management discipline addresses the presence of market risk and its effects, it has no predictive value. What does that mean? When we make portfolio adjustments to be either more or less invested depending on our market readings, we do so not to predict future outcomes but rather to position ourselves consistently with the current market trend. The market trend currently stands in bullish fashion, as demonstrated by the impressive market advance last week. Put in context, however, the market advance has done nothing more than keep us near break even for the year, as is almost every other professional money manager. As it has become clear that the herd of professional money managers has been throwing their support to President Bush, the market as a whole doesn’t have a bias one way or another when it comes to handicapping a Presidential election. The market crowd, however, can express relief over the likelihood of an outcome, in this case the end of what has become a divisive and often bitter election cycle. One thing is certain, and that is that tomorrow is coming, and the actions taken by the interested and proactive members of our democracy will surely be heard, maybe.
