A renewed rise in oil prices kept stocks in a tight range as traders came back from the Labor Day weekend. As expected, trading volumes rose to a four-week high on both the Dow Jones Industrial Average and on the NASDAQ. For the week, the Dow gained 53 points (+0.5%) and settled at 10313. The NASDAQ received mixed reports from chip companies during the week but still managed to close above its 50-day Simple Moving Average on Friday as it gained 50 points (+2.71%) for the week and closed at 1894.
The investment community’s collective summer break came to an end after the Labor Day weekend, and for the markets it back to business as the low volume we’ve seen over the summer months has begun to pick up. Higher volumes indicate higher participation and for money managers who measure market support (or resistance) based on volume, the higher numbers offer better data. Equity funds report net cash inflows totaling $2.215 billion in the week ended September 8, with 71% going to funds investing in Domestic Equities. International funds also reported inflows to all foreign markets except Japan.
As a handicapping mechanism, the markets are reacting positively to recent election poll numbers indicating that President Bush is extending his slim lead over Sen. Kerry. As the markets tend to react favorably to an incumbent president winning another term (regardless of his party affiliation), the recent bounce we’ve seen following the Republican National Convention may be a precursor to a larger advance should the polls be right.
THE COMPASS PORTFOLIOS
While we continue to be cautious, we have taken steps to put a sizable portion of our money market assets to work into more productive areas. While few (if any) of the issues which led to the summer volatility have been resolved, institutional money managers are actively putting additional cash to work. We have taken steps to be more fully invested, and now carry a more neutral money market exposure. Prudence dictates that we proceed cautiously, as the aforementioned summer issues (namely the continued war on terror, higher oil prices and the upcoming election) will undoubtedly continue to be of concern. Additionally, none of the advances attempted by the markets so far this year have resulted in any permanence, at least not yet.
Doing too much vs. doing too little. This is one of the central issues that I frequently confront as a professional money manager. Now, more than ever, the equity markets are mechanisms of opportunity. Opportunity for significant profit for those well positioned to participate, opportunity for significant losses for those who fail to invest with a true discipline. Using equities as tools for growth can mean a life of continued comfort, a life of doing good deeds, a life of stability and sustenance for those who embrace our free markets. However, the “extreme” capitalism of our day also requires that a strict wealth management discipline be embraced to avoid the slippery slope of compounded losses. During 2003, 1.3 million Americans slid into poverty. Poverty due to job losses or due to financial mismanagement or due to terrorism or due to sizable stock declines is poverty none-the-less, a condition that I fear will become a greater burden for those with no recourse. The double edged sword of extreme capitalism means that some in our society will thrive and some will languish.
More than a few clients (including my mother and grandmother) have noticed that several times this year, we’ve taken a defensive position by selling an index at a given price, then buying it back later at a slightly higher price. The net result has been that we’ve missed out on a small amount of opportunity (and incurred a small commission) by taking a prudent but unnecessary step. The “unnecessary” part of the equation became evident as the weakness that we were responding to quickly abated. Had the weakness persisted (which is always our assumption), the position would have continued to decline, creating sizable losses and rendering our discipline useless. Our markets will undoubtedly continue to be volatile, creating individuals who thrive and individuals who languish. Those who thrive will do so not because we sold a position at $100 and bought it back later at $105; rather, they will thrive because we sold a position at $100 (to protect against holding it should it drop to $75) and bought it back later at $105 (to protect against not owning it should it rise to $125). Doing too much can occasionally mean that we’ve been on the wrong side of the market for a short period of time, but doing too little can mean that we’re caught on the wrong side of the market for a long period of time, always an intolerable condition.