THE MARKETS
An already erratic market was besieged with negative headlines all week as mid-east tensions, accounting irregularities and earning warnings permeated the scene. The big news for the week was the Dow’s explosive move on Tuesday, which saw the index soar over 200 points to close at 10301.32. But has been the case of late, the rally was short lived as the DJIA was under pressure for the remainder of the week. For the period, the DJIA eked out a 67 point gain (+0.7%) and closed at 10,257. The NASDAQ fared much better as it climbed above 1800 for the first time since 04/02/02. For the week, the index gained 40 points (+2.3%) and ended the period at 1,796.
Investors should be encouraged by the number of NYSE companies making new highs, a healthy indicator seemingly lost on many market pundits. The strength in the internal market statistics, especially the NYSE advance/decline line (at a 30 month high as of last Friday) points toward increasing strength.
Investors are bracing for another crush of earnings reports next week. On Monday, diversified conglomerate 3M and fiber optics company Corning are due to report. Oil major ExxonMobil and snackfood and beverage giant PepsiCo step up to the plate on Tuesday. Media giant AOL TimeWarner and telecom heavy AT&T are set to release their earnings on Wednesday, and WorldCom and Tyco follow on Thursday.
THE COMPASS PORTFOLIOS
Our market posture remains unchanged from last week, with the emphasis continuing to be on value over growth. The continued struggles of high visibility/high impact growth companies (such as IBM and GE) have dampened advances in the indexes; however, our models have largely ignored these market segments in favor of dividend paying equities. The relative stability of the portfolios (given the overall market apprehension) has been welcome. This does not mean, however, that we have been able to realize significant headway given the lackluster market. Our portfolio posture allows us to participate in the market and to simultaneously manage (not eliminate) risk. We continue to anticipate higher equity prices during the 2nd and 3rd quarters, should the economic recovery become more evident, and at the same time stand vigilant against significant market corrections.
THE ECONOMY
It almost sounded as if Alan Greenspan was talking to Mission Control instead of Congress. In his Apr. 17 testimony before the Joint Economic Committee of the House and Senate, the Federal Reserve Chairman compared the present economic situation to a “two-stage rocket.” The first stage of the current recovery was ignited by businesses replenishing inventory after stocks were drawn down significantly in the first quarter. But the second stage — marked by self-sustaining growth in final demand — hasn’t yet fired. Stage 1 of the recovery became evident when the Fed’s monetary policy stance shifted to neutral from an easing mode. Yet it was clear from Greenspan’s remarks that he’s not quite prepared to go to stage two — and tighten interest rates. Greenspan began his testimony by reviewing the second paragraph of the policy statement from the Mar. 19 meeting of the Fed’s rate-setting arm, the Federal Open Market Committee. Thanks to the inventory swing, he repeated, the economy is expanding at a “significant pace.” But, he added, “the degree of strengthening in final demand over the coming quarters, an essential element in sustained economic expansion, is still uncertain.”
Next week will be a busy one on the data front as well. Economic reports to watch include March durable goods orders and new home sales on Wednesday; the employment cost index for the first quarter, weekly jobless claims and existing home sales on Thursday; and the University of Michigan consumer sentiment survey for January and advance reading on first quarter gross domestic product on Friday. Most economists expect first quarter GDP growth of 5.0%, up from the 1.7% in the fourth quarter. The consumer sentiment survey, a gauge of consumer’s optimism about the economy, is seen ticking up to 94.6 from 94.2.
