December 6, 2004
SOUND AS A DOLLAR OR AS GOOD AS GOLD
I. NOVEMBER 2004 COMMENTS...STOCKS RALLY SHARPLY...BONDS AND DOLLAR WEAKEN... AS OIL FALLS AND GOLD SURGES
- Declining oil prices ignited a stock market rally as November ended. Oil demand remains strong as economic activity in China and India remains high while little incremental supply is expected to reach market over the next few years. However, high energy prices have encouraged conservation, and inventory data suggest supplies are adequate for the time being. Sharp price spikes are unlikely unless severe cold weather develops this winter or supply is limited by geopolitical developments.
- Lower oil prices may enable global economic growth to recover from this autumn’s soft period. Thus far, Europe remains weak, but U.S. GDP growth is apt to strengthen as employment improves.
- Weakness in the dollar, rising gold prices and higher commodity prices suggest some pickup in inflationary pressures for 2005 and beyond. As of this point in time, Federal Reserve policy continues to be accommodative, although bond market participants are beginning to worry about interest rate trends.
- Rising prices for imported goods may soon start to negatively impact inflation readings. U.S. manufacturers use import prices as a cover for price hikes. The expectation of higher prices, rising interest rates and a weak dollar have all resulted in a higher price for gold.
II. ECONOMIC OUTLOOK ...GDP GROWTH IMPROVES...JOB GROWTH CONTINUES...CONSUMER PICTURE MIXED...CAPEX REMAINS STRONG
- The outlook for consumer spending depends heavily on new job creation in the months ahead. In early December, the Labor Department reported creation of 112,000 new jobs, well below expectations. Strong job growth was derailed by a slow start to the holiday shopping season. Increased internet shopping and gift-card purchases render the historic data less reliable as indicators.
- It seems likely that consumer durable goods such as autos, appliances, and other big-ticket items will be weak in the months ahead while non-durables will fare better. Improving consumer confidence measures probably reflect improving job conditions.
- Business spending is relatively strong but factory orders are flattish and accelerated depreciation allowances expire at year-end. Rail, trucking and ocean shipping markets remain robust as goods and raw materials find ready buyers overseas. Business construction is slow but equipment sales are doing quite nicely.
- General export sales should begin to show strength although exports of industrial commodities have remained strong throughout the year. Efforts to stabilize the value of the dollar will probably get expanded coverage in the financial press in the months ahead.
III. FIXED INCOME OUTLOOK ...WAGE INFLATION MODERATES...CONSUMER PRICE STABLE...PRODUCER PRICES JUMP...FURTHER RATE HIKES COMING
- The Federal Reserve Open Market Committee meets again on December 14 th. Another rate hike is likely. In recent weeks, the yield on the 2 Year U.S. Treasury Note has risen, suggesting the market anticipates another hike in the Fed Funds rate.
- Producer prices rose a sharp 1.7% in October after many months of stable readings. While food prices rose, energy prices shot up by 6.8%. Core producer prices rose 0.3%. Consumer prices mirrored the rise at wholesale, moving 0.6% higher. Excluding food and energy, consumer prices rose a moderate 0.2%.
- Globalization, competition and technology are exerting downward pressure on inflation while the weak dollar, rising commodity prices and higher energy costs are exerting upward pressure. The interplay of these forces will dictate market trends.
IV. STOCK MARKET OUTLOOK ... SEASONAL FACTORS STRONG...PROFIT MARGIN PRESSURES COMING...WAGE & BENEFIT COSTS MODERATING
May we take this opportunity to extend to you our very best wishes for a happy holiday season, and a healthy & profitable new year.
- Seasonal strength typically characterizes the November-February period. During earnings reporting season, investors will pay close attention to managements’ forward-looking comments accompanying year-end results.
- A number of industries are enjoying greater pricing power but those that do not must continue to pay attention to cost control. Industrial commodity companies with stable cost structures offer value here. So do integrated oil, drilling and oil services companies based on energy prices which are apt to remain high compared to previous years.
- As competitive conditions intensify, beneficiaries of advertising spending should do well, including media companies. Business and consumer services stocks should also perform well as firms attempt to cut costs through outsourcing.
- Consumer staples stocks offer appeal as energy cost and unemployment rates decline. Exporters across several economic sectors will tend to do better as well.
We believe stocks will tend to move higher during 2005, in spite of a gradual rise in interest rates.
VISIT US IN OUR OFFICES OR AT OUR WEBSITE, www.beacontrust.com
John W.
Gustafson
Senior Vice President
| 12/31/03 | 11/30/04 | Change | Dividend Yield | |
| S&P 500 Index | 1111.92 | 1173.82 | 5.57% | 1.6% |
| Dow Jones Average | 10453.90 | 10428.00 | -0.25% | 2.0% |
| Treasury Bonds (10 yr.) | 4.25% | 4.35% |
Beacon Trust Company
333 Main Street, Madison, NJ 07940
(973) 377-8090