THE MARKETS
The market continued on a roll last week as the Dow Jones Industrial Average reached its highest level since June of 2002 while the NASDAQ posted a 19-month high. The month of October has seen the Dow finish higher on six of the eight trading days while the NASDAQ is up seven out of eight. In addition, all of the indexes with the exception of the Dow Jones Utilities Index and the S&P 500, which missed by .85 of a point, posted new recovery highs during the week, confirming the movement of the Dow. So far this month the Dow has advanced 4.3% while the NASDAQ has jumped 7.2%, not bad for what is traditionally an uncooperative month. For the week the Dow gained 102 points (+1.07%) and closed at 9674. The NASDAQ followed suit as it added 35 points (+1.86%) for the week and closed at 1915. For the week ending October 8, 2003, U.S. equity mutual funds had solid inflows of $3.6 billion compared to outflows of $2.2 billion the previous week.
Corporate earnings season is once again upon us with several key companies already announcing earnings that either met or beat street expectations. Companies on tap this week include Johnson & Johnson and Bank of America Tuesday morning with chip giant Intel due the same day after the close. Wednesday morning sees GM while IBM reports Wednesday evening. Coca-Cola announces Thursday morning along with wireless bellwether Nokia while United Technologies reports in the afternoon.
THE COMPASS PORTFOLIOS
One minor modification to our models last week as most of the little remaining cash in clients’ portfolios was put to work. Portfolios had been holding modest amounts of cash (approximately 10%) and now sport a fully invested posture. The markets stumbled across the finish line at the end of the third quarter, and then rebounded sharply as short positions used to protect reported gains were replaced pushing market averages higher (see Weekly Market Comment for September 29, 2003). The process of systematically keeping portfolios on the “right side of the market” has proven to be most beneficial during the recent market upturn as defensive instruments have been converted into more assertive instruments. Being positioned properly for the market directly ahead means being prudently assertive when appropriate, and prudently defensive when appropriate. By sharply reducing cash and fixed income positions during market expansion, we are able to markedly improve portfolio performance. This process, however, requires constant monitoring as the markets continue to be dynamic. It is this activity that we commit ourselves to, and we embrace the responsibility that accompanies it.
THE ECONOMY
U.S. wholesale prices rose a bit in September, the government said Friday, above Wall Street forecasts. The Labor Department said its producer price index (PPI), a measure of wholesale prices, rose 0.3 percent following a 0.4 percent gain in August. The so-called core PPI, which excludes often volatile food and energy prices, was flat after rising 0.1 percent in August. Economists, on average, expected PPI and core PPI to rise 0.1 percent, according to Briefing.com. Low inflation has been a hallmark of the economy in recent years — good news for consumers, but not necessarily good news for companies, some of which are struggling to maintain pricing power. Some goods producers, in fact, have seen outright “deflation,” or falling prices, drawing nervous comparisons between the United States and Japan, the world’s second-largest economy, which has suffered from deflation for much of the past decade. Though economists doubt the United States will face outright deflation, the Federal Reserve continues to look out for “disinflation,” or slowing inflation, which could set the stage for deflation if the economy should weaken. With this in mind, the Fed has kept the target for its key overnight lending rate at the lowest level in more than 40 years. Low rates encourage borrowing and economic activity, and the Fed hopes it will also support corporate pricing power.
A survey of top manufacturing executives showed Thursday the highest level of optimism in six years, suggesting the beleaguered factory sector is finally beginning to recover. The Manufacturers Alliance/MAPI said its quarterly index of future business activity jumped to 68 in September from 60 in June, notching the highest reading since the index stood at 71 in December 1997. A measure above 50 indicates overall manufacturing activity is expected to increase over the next three months.
Lastly, jobless claims fell last week, the government said Thursday, below the 400,000 level that many economists believe is a benchmark for labor-market weakness. The Labor Department report said 382,000 people filed for benefits in the week ended Oct. 4 — the lowest level since the week of Feb. 8 — compared with a revised reading of 405,000 in the prior week. Economists, on average, expected 394,000 new claims, according to Briefing.com. Many economists view 400,000 jobless claims as the sign of a soft job market.
