THE MARKETS
The Dow Jones Industrial Average snapped its three-week winning streak as mixed earnings results combined with lofty stock valuations kept pressure on stocks. For the week, the Dow gave up 139 points (-1.43%) and closed at 9582. The NASDAQ followed suit as it lost 47 points (-2.46%) and closed at 1865.
Strong results from technology and financial services companies were offset by mixed results and disappointing guidance from health care and basic materials companies. Both Merck and Microsoft led the pack downwards, losing 8% each despite Microsoft beating earnings and revenue estimates. Companies are once again priced for perfection and the biggest issues facing the markets between now and the end of the year is justifying current valuations.
Looking ahead, the Federal Reserve meets again this week, and is expected to leave rates unchanged. However, it is likely that the accompanying commentary will be more optimistic than after recent meetings and may go so far as to prepare the markets for higher interest rates sometime next year.
THE COMPASS PORTFOLIOS
No changes to our models again despite the weakness. The supportive trend continues and is reflected in our assertive posture. It seems more likely that we will be able to maintain current allocations at least through early November and that harvesting gains at the current time would be unjustified.
Our thanks continue to go out to Morningstar™ for their help in documenting our portfolio performance and easily comparing our results to the universe of money managers who offer both mutual funds and separately managed accounts. To be succinct, the results are breathtaking. By measuring and comparing gross performance, the amount of risk taken, the amount of value added by the management process, and the amount of our performance attributable to the markets The Compass STAR and STAR PLUS are standout performers. In each of these statistical categories, our portfolios shined when compared to both the S&P 500 and to our peer groups. This data reflects three-year performance for the period ending June 30, 2003, and we expect the data from the end of September to be equally impressive. If you’d like a copy of the Morningstar reports, please feel free give us a call!
THE ECONOMY
Will it be business as usual for Alan Greenspan & Co. at the Oct. 28 meeting of Federal Reserve policymakers? Probably. All indications are that the central bank will maintain its “very accommodative” 1% Fed funds rate and leave its bias unchanged. Recent comments by Fed officials bear out the view that the status quo will remain intact next week — but the remarks also highlight subtle changes that may be included in the Fed’s policy stance, which splits the outlook for economic growth and price stability. One obvious way for the Fed to reaffirm its inflation credentials with Wall Street would be to upgrade its view of the economy’s prospects from “upside and downside risks roughly equal” to risks “skewed to the upside.” While such a bold stroke probably won’t happen this month, it could be adopted at the Dec. 9 meeting — especially if the government’s initial estimate of third-quarter gross domestic product on Oct. 30 comes in at 6% and possibly higher, as many economists expect. The fact is, financial markets are betting that the Fed is starting to fall behind the curve on growth, if not inflation. This may not be a particular concern for the central bankers, who reiterated that “policy accommodation can be maintained for a considerable period” in their September statement. Still, according to odds implied by Fed funds futures, a vehicle for betting on the future direction of rates, the market sees about a 60% chance that the Fed will hike rates by a quarter-point by Mar. 31.
Jobless claims fell in the United States last week, the government said Thursday, remaining below the key 400,000 level for the third straight week. The Labor Department said 386,000 people filed for benefits in the week ended Oct. 18, compared with a revised reading of 390,000 in the prior week. The number was mostly in line with economists’ consensus average estimates of 385,000 new claims, according to Briefing.com. New claims have fluctuated in a narrow range near the 400,000 mark since mid-July demonstrating stability but no real growth as of yet.
Lastly, U.S. mortgage rates held steady amid a void of economic news, but the number of applications for home loans continues to push into record territory, mortgage financier Freddie Mac said Thursday. The rate on 30-year fixed-rate mortgage loans held steady at 6.05% in the week ending Oct. 24th. At the same time last year, the 30-year rate stood at 6.31%. The 15-year fixed-rate mortgage inched higher, to 5.39% from 5.36% last week. A year ago, the 15-year rate stood at 5.70 %.
