THE MARKETS
Falling oil prices ignited a rally that carried all of the major averages back above their 200-day moving average. The NASDAQ and the S&P-500 were able to push through their 50-day moving average for the first time since April 28th. In addition to the break in oil prices, continued strong earnings and a lull in the news from Iraq gave the bulls all they needed to go into the holiday weekend on an up note. For the week the Dow Jones Industrial Average was up 222 points (+2.24%) and closed at 10188.
The NASDAQ was able to post back-to-back winning weeks for the first time since the end of March. For the week, the NASDAQ gained 74 points (+3.87%) and closed at 1986.
Stocks were able to put oil and geopolitics in the rearview mirror for a day on Tuesday, allowing both the Dow and NASDAQ to close above their 200-day moving averages for the first time in nearly three weeks. The rally came on volume that was light but well above the previous three sessions, with approximately 1.5 billion shares traded on the New York Stock Exchange.
THE COMPASS PORTFOLIOS
No changes to our model portfolios last week. We remain committed to keeping client portfolios “on the right side of the market.” At the present time, the general lack of institutional support for equities has resulted in a very flat market year-to-date, resulting in little meaningful gains or losses. The “right side” has been somewhat nonexistent this year, as a flat market has few “sides” to it! Institutional activity in large part defines the market, and their collective concerns over higher interest rates, Iraq, and inflation have guided our portfolio allocations. It appears that the trading ranges we have discussed over the past few months have survived their latest test, and the risk of sustained weakness is becoming less of a concern over the near term. That being said, caution is always warranted, and should the markets demonstrate better support we will be able to adjust accordingly. In the meantime, our extreme allocation remains prudent given the current state of the markets.
For the year, our actively managed discipline has slightly trailed the overall market. Put in context, being slightly ahead or slightly behind has little real impact as the Dow is down 2.5% this year while the NASDAQ is down only 1.1%. Minor moves, reflective of the narrow trading range of the current year so far. “So far” is the key. History teaches us that being late to the party (fully participating in a bull market advance only when the trend is solidly in place) is the best position to be in. When fully invested (and the likelihood of market advance is high), our more volatile growth investments (roughly half of the portfolio) tends to accelerate ahead of the overall markets. Being cautious means a greater likelihood of being right. Once the market has a clearly defined trend, it will be easier to gauge whether our current allocation is too conservative or whether it is right on.
THE ECONOMY
Durable goods orders to U.S. manufacturers dropped 2.90% in April, according to a government report, well past Wall Street’s consensus estimate that called for only a 0.9% dip. Orders in March were revised up to a jump of 5.70% from the previously reported 3.40%. Excluding transportation, new orders fell 2.10% and excluding defense, new orders dropped 2.40%, indicating a broad based decline in orders from the manufacturing sector.
The U.S. economy grew faster than initial indications in the first quarter, the government reported Thursday, but the second look at gross domestic product came in below economists’ estimates. A revision of the first-quarter GDP growth came in at a 4.40% annual rate, up from an initial reading of 4.20% and below expectations of 4.50% growth, according to Briefing.com. With the Federal Reserve expected to lift interest rates this summer, Thursday’s revised GDP reading may influence the amount and timing of the hike. The core price index for consumer spending — a closely watched measure of inflation excluding volatile food and energy prices — rose at an annual rate of 1.7%, down from an initial reading of 2%.
New home sales posted the biggest monthly drop in 10 years in April, coming in much weaker than Wall Street expectations. The Commerce Department reported new home sales at an annual rate of 1,093,000 in the month, down 11.8% from the revised record high 1,239,000 rate in March, when mortgage rates were near a 40-year low. Economists surveyed by Briefing.com had forecast that sales would fall to an annual rate of 1.2 million.
In related news, new U.S. mortgage applications posted their third consecutive week of declines last week with refinancing demand hitting a 2004 low as mortgage rates rose again, an industry trade group said Wednesday. The Mortgage Bankers Association said its seasonally adjusted market index, a measure of weekly mortgage activity, fell for the week ending May 21 by 3.3% to 632.4 from the previous week’s 654.1 reading.
