JUNE 10, 2003
I. MAY 2003 COMMENTS … STOCKS STRONG…BONDS TO NEW HIGHS…LOOKING FOR CONSISTENCY
- Stock prices advanced steadily in May, with strength continuing
into June. The economic backdrop has not shown substantial positive
change and bond yields remain at multi-decade lows.
- The bond market is signaling a subdued economic recovery
with inflation remaining low. Investors have accumulated sizable
reserves in money market accounts, bond funds, certificates of
deposit, Treasury and agency obligations, and the like. Only
a small portion of these reserves has thus far found its way
back into the equity markets.
- To our way of thinking, a slow, gradual economic recovery
does not have the same implications for the stock market as a
robust expansion. A slow, uncertain recovery places a premium
on careful stock selection, and calls for the emphasis of defensive
stock groups such as consumer staples, health care, utilities,
and similar sectors where demand trends do not depend on rapid
economic expansion. In a more robust recovery, groups such as
commodities, industrial equipment, transportation, consumer durables,
energy, and technology/telecommunications tend to lead the market
and stock selections emphasize more volatile issues. Thus far,
leadership in the recovery phase that began last October has
focused on the depressed technology and telecom sectors. We
tend to be underweight in these sectors and are continually reevaluating
our stance in light of expected economic and market trends.
- In our view, current leadership and projected economic trends
are not consistent, and we are making selective changes as we
build portfolios that offer above-average prospects for capital
growth in a volatile market.
II. ECONOMIC OUTLOOK …INDICATORS MIXED…MILD PICKUP LIKELY OVER 2003
- Consumer confidence rose sharply in May, reversing the declines
associated with pending war in Iraq. Expectations data in the
report were especially strong, but the attitude towards consumers'
present situation remains low. This sub-index usually tracks
closely with employment data. Layoffs continue to creep up,
with the unemployment rate now at 6.1%. Keep in mind that the
data continues to be affected by the war, weather conditions,
and a late Easter. By mid-summer, the data will be more trustworthy.
- Purchasing Manager surveys revealed considerable expansion
in the services sector in May, with strength in new orders, better
productivity, and some pickup in employment. Manufacturing businesses
remain in contraction but some improvement was noted. Factory
orders were weaker than expected and construction spending was
slightly lower. Inventory to sales ratios fell to a record low
and bank commercial and industrial loans also contracted.
- Congress passed the long-debated tax cut of $350 billion.
Considerable impact will be felt in this year's summer quarter,
when benefits of tax-reduction, accelerating mortgage refinancing,
auto rebates, and business borrowings in the bond market will
be felt. In addition, we suspect that there is a more-than-even
chance of another Fed-induced rate cut.
III. FIXED INCOME OUTLOOK …INFLATION MUTED…CORPORATE PROFIT GROWTH TO ACCELERATE MODESTLY
- Wholesale prices fell a record 1.9%, with the core rate,
excluding food and energy, dropping 0.9%, the largest decline
since 1993.
- Consumer prices fell by 0.3%, the largest decline in 18 months,
as energy prices retreated. Cars, clothes, and food prices also
fell. The core rate was unchanged.
- The Federal Reserve meets again June 24-25 and another rate
cut is quite possible. Some observers expect a reduction of
0.5% with the Fed Funds target going from 1.25% to 0.75%.
- The recent weakness in the dollar will have various negative
affects but will also allow domestic prices to rise a bit assuming
prices of competing imported goods are increased. This should
contribute to quarterly profit gains in some small way in the
periods ahead.
IV. STOCK MARKET OUTLOOK …RESERVES HUGE…BUYERS TESTING THE WATER…STOCK SELECTION CRITICAL
- In our view, markets are starting to sense an improvement
in economic activity. Indicators are sparse, but reserves are
truly extraordinary and stock buyers see marginal return prospects
in bonds. Given the 22-year bull market in bonds, investors
are hesitant to return to equities.
- Financial stocks should perform well as long as rates bump
along near their lows. Demographic trends support health care
issues. Large-cap pharma issues have been through their own
bear market and prospects are improving, but Maine's drug pricing
legislation still raises uncertainty. Energy issues, particularly
natural gas stocks, should do well as the economy recovers and
world growth ramps up.
- Valuation issues cloud the outlook for tech and telecom stocks.
SARS is having a negative effect on business and consumer activity
in China, the world's demand engine of recent years.
- As is usually true, generalizations on sectors can be dangerous.
Careful stock selection and risk control are the keys to success.
NOTE: VISIT US AT ANY TIME IN OUR OFFICES AT 333 MAIN
STREET OR AT OUR WEBSITE, www.beacontrust.com
John W. Gustafson
Chief Investment Officer
| 12/31/02 | 5/31/03 | ||
| S&P 500 Index | 879.82 | 963.59 | 9.52% |
| Dow Jones Average | 8341.63 | 8850.26 | 6.10% |
| Treasury Bonds (10 yr.) | 3.82% | 3.37% |
Beacon Trust Company
333 Main Street, Madison, NJ 07940
(973) 377-8090