THE MARKETS
Despite upbeat earnings reports from IBM and DELL, the market couldn’t shake off its negative bias last week as the Dow Jones Industrial Average finished in the red for the fourth straight week. For the period, the Dow lost 74 points (-0.72%) and closed at 10139. The NASDAQ, which broke below 1900 for the first time since mid-May, continued to slump as tech stocks remained under pressure. For the week, the NASDAQ lost 63 points (-3.24%) and closed at 1883. For the year, the Dow is down 3.0% while the NASDAQ has lost 6.0% of its value.
It should be noted that the S&P-500 closed below its 200-day moving average which is currently at 1103. This is a negative for the market since the 200-day represents a significant support area, and while it has been tested twice already this year, is a concern. For the week ending 07/07/04, U.S. equity mutual funds had outflows of $170 million compared to inflows the previous week of $2.5 billion.
For this week, attention turns to earnings, as the 2nd quarter corporate results begin to be posted. While earnings are expected to be strong (posting 20% – 25% higher earnings versus last year’s 2nd quarter), much of the attention will be on guidance for the upcoming quarter and into 2005. Analysts believe that the rate of earnings growth will slow dramatically going into next year, creating concern that market valuations may be too high.
THE COMPASS PORTFOLIOS
The offensive allocations in place at the end of June have failed to hold, as we have begun to reduce equity exposure once again. The markets have continued to be range bound, creating a very challenging environment for all investors. Our managed income allocation, however, has performed flawlessly, with both our high-yield position and our utility position moving ahead nicely. This strength has helped to partially offset the weakness of our growth components. By using a combination of tactical asset allocation (making adjustments to stay on the right side of the market) with strategic asset allocation (using a diverse palate of investments), we can further manage the risk of sustained market declines. We are now moving toward a more neutral asset allocation, making the necessary adjustments to keep our clients on the right side of the market.
The last flat year on record for the equities markets was 1994, the same year the Federal Reserve last began a campaign to sharply raise interest rates. During that year the S&P 500 was up a modest 1.31%. While history rarely repeats itself exactly, investors will remember the market performance of the five years that followed: +37.45%, +22.88%, +33.19%, +28.62%, +21.07%. Market environment means so much to all investment disciplines, including ours, and the current flat market can certainly be a true test of patience. Our continued goal is to manage the risk of sustained market decline while simultaneously positioning client assets to participate in sustained market advances. As we believe it is important to measuring progress over a complete market cycle, it is important to know in advance that an occasional flat market is normal, if not unwelcome.
THE ECONOMY
Recent fears over accelerating inflation appear to be overblown. The trend in the core rate of CPI (prices excluding energy and food) over the past four months is now: 0.4%, 0.3%, 0.2%, and 0.1%. This downtrend is not likely to continue, but it has reduced the fears that underlying inflation is increasing. The June Consumer Price Index rose 0.3% with the core rate rising only 0.1%. The extra increase in the total index was due to a 2.6% increase in energy prices. That was due in part to a rise in gasoline prices of 3.1%. Since this survey, gasoline prices at the pump have declined modestly, resulting in a smoothening of the CPI change. So, the overall gain of 0.3% is not of great concern to the market with core rate of +0.1% that is providing comfort to the financial markets. Briefing.com expects the core rate to stabilize near 0.2% per month going forward. That equates to close to a 2 1/2% underlying inflation rate.
Despite concerns that the country’s economic recovery may have hit some speed bumps, visits to employment Web sites rose sharply in June, Internet audience measurement service Nielsen NetRatings said Friday. Traffic to career sites rose 30 percent in the month over a year earlier, NetRatings said, with a total of 27.2 million people visiting such pages. Monster.com topped the charts with a unique audience of 9.6 million users. It was followed by CareerBuilder with 9.3 million users and Yahoo Inc.’s HotJobs with 7.1 million users.
