FEBRUARY 7, 2003
I. JANUARY 2003 COMMENTS … STOCK VALUES DROP…BONDS
HOLD STEADY…INVESTORS CHOICES
- Stock prices moved lower in January although the month was
punctuated by occasional sharp daily gains. Economic data was
generally positive with the exception of employment trends. Employment,
it should be noted, is a lagging indicator that will not begin
to improve until the economy is moving forward at a faster pace.
The major uncertainty continued to revolve around possible war
with Iraq. If market experience around the time of the first
Gulf War is any guide, risks are greater before the outbreak
of hostilities.
- We are presently experiencing an unusual combination: historically
low bond yields and rising prices of both gold and energy. Monetary
policies remain very expansive although gold price levels suggest
that market participants are aware that deflationary trends are
being fought with every weapon at the disposal of the monetary
and fiscal authorities.
- On a short-term basis, investor choices are not especially
appealing: yields on cash equivalents are nearing 1%, Treasury
Note and Bond Yields are at 40-year lows, and stock market prospects
seem hostage to events beyond investor control, specifically
geopolitical developments. The proper investor response is to
focus on asset allocation, bond characteristics and stock selection.
II. ECONOMIC OUTLOOK …GDP GAINS…MANUFACTURING OUTLOOK IMPROVES SOURCES OF GROWTH
- GDP rose 0.7% in 2002's final quarter. Importantly, that
report showed that business investment rose for the first time
in nine quarters. Improving prospects are also suggested by the
Chicago Purchasing Managers Index (PMI). The production and new
orders indexes of the PMI both rose sharply. This confirms earlier
reports of a rebound in factory orders. If these gains continue
over the next few months, we should see better job creation trends
by summer.
- In addition to these hopeful signs of recovery in the manufacturing
sector, the Institute of Supply Management Survey (ISM) revealed
that services businesses continue to expand. In addition, ISM
data revealed that employment expanded in January for the first
time in 22 months.
- Consumer spending data remained strong. Sales of both new
homes and existing homes rose in December. Personal income gained
0.4% and spending rose 0.9%, the best gains since last summer.
Consumer confidence measures remain relatively low, but such
data tracks rather closely with employment trends.
- Government spending continues to move higher and there is
anecdotal evidence that the weak dollar is stimulating export
sales. Energy prices have moved sharply higher in the past few
months and will begin to cut into disposable income. Recently-proposed
Bush Administration tax cuts would tend to mitigate energy price
increases if Congress acts quickly. Cash flow benefits of mortgage
refinancing will taper off towards year-end. Thus, the importance
of business investment spending over the course of 2003 is clear.
III. FIXED INCOME OUTLOOK …INFLATION TAME…FEDERAL RESERVE LEAVES RATES UNCHANGED…GOLD PRICES SPIKE HIGHER
- Money market fund rates reached new cycle lows over the past
few weeks. Some taxable fund yields broke well under 1% and average
tax-exempt yields declined to 0.65%.
- Producer prices were unchanged in December but the core rate
dropped 0.3%. Energy prices rose 0.9% as the Venezuelan oil strike
has disrupted supplies. Gasoline prices rose 1.6% while cold
weather in the northeast US pushed heating oil prices up by 4.7%.
- Consumer prices were also well behaved, rising 0.1% in December.
The core CPI also rose 0.1%. In 2002, the CPI rose 2.4% reflecting
a 10.7% gain in energy prices. Energy fell 13% in 2001.
- Federal Reserve policy makers left interest rates unchanged at their January meeting. Gold prices have been strong, as have crude oil prices. This reflects the weakness of the dollar in recent periods.
IV. STOCK MARKET OUTLOOK …WAR WORRIES…SERVICES EMPHASIS…DIVIDENDS IN VOGUE
- War risks continue to weigh heavily on stock prices. Investors
are concerned that further terrorist acts against the U.S. may
follow an invasion of Iraq. In times of uncertainty, investors
at the margin may prefer the safety of Treasurys to the opportunity
of equity.
- We have added to our energy holdings and are looking closely
at other commodity producers.
- Business and consumer services continue to offer appeal.
Many of these firms enjoy some ability to raise prices, unlike
most goods manufacturers. Demand trends also tend to be more
stable.
- We remain underweight in technology and telecommunications
preferring instead to own companies that enjoy the productivity-enhancing
attributes that technology can allow. Demographic trends favor
financial services, health care, leisure and other industries
providing the goods and services needed or wanted by an aging
population.
- In each sector, we continue to include dividend return as
a key measure of investment appeal.
NOTE: VISIT US AT ANY TIME IN OUR OFFICES OR AT OUR
WEBSITE, www.beacontrust.com