MARCH 6, 2004
I. FEBRUARY 2004 COMMENTS … STOCKS MOVE UP…BONDS MARK
TIME
- Brief and shallow consolidations characterized February, but prices
managed to show gains for the month. Companies with earnings and dividends
performed well.
- In contrast to last year, market interest has tended to focus on quality
and size, with speculations and small caps losing momentum. This shift
toward quality and the flexibility inherent in global corporations is in its
early stages, and promises to be a multi-year trend. There are other
inflection points in the financial markets that will become clear in the
months ahead, but the shift to quality is probably the most
meaningful.
- Bond buyers have been cautious fearing rising inflation and sharply
recovering employment levels. Both have been slow to materialize.
- Employment trends should improve this spring. Interest rates remain near
historic lows and economic strength will likely push rates higher in the
months ahead. Currency markets remain volatile and the U.S. continues to
import more than it exports - by a wide margin. Changes are likely in these
indicators. We feel confident in the direction of these changes but confess
uncertainty as to timing.
II. ECONOMIC OUTLOOK …EMPLOYMENT INDICATORS MIXED…PRESIDENTIAL CAMPAIGN AFFECTS CONFIDENCE…CORPORATE PROFITS STRONG
- The U.S. economy added far fewer new jobs in February than forecast.
Possible causes include weather conditions, seasonal adjustment factors, and
possible flaws in the sampling techniques used to estimate jobs growth. In
spite of this, employment should rise strongly in 2004. Thus far this
optimism is more reflected in corporate hiring plans than in jobs created.
- Consumer confidence has probably been hurt by political attention drawn
to employment data. However, actual spending seems to be on a strong growth
path. Industrial production, capital spending, and purchasing managers plans
all suggest further output growth. Strong trends in corporate profits
historically lead to rising employment and this economic recovery will
ultimately prove to be no different.
- Consumer confidence and spending decisions will be supported in the next
few months by sizable tax refunds, recovery in mortgage refinancing volumes,
and continued growth of self-employment. Money supply is again expanding and
business loan demand has turned upward.
- The two-year decline in the value of the trade-weighted dollar has
stimulated export growth. Fluctuating currency values have meant higher
prices for imported goods. This is positive for large, U.S. - based,
multi-national corporations.
III. FIXED INCOME OUTLOOK …INFLATION STILL WELL-BEHAVED…SERVICES INFLATION… COMMODITY PRICES RISE ON CHINESE DEMAND
- Interest rates on most Treasury maturities have returned to their 2003
lows. Both domestic banks and foreign central banks have been heavy buyers
(sending bond prices up and interest rates down.)
- Commodity prices continue to advance, driven by demand from China. At
the same time, Chinese finished goods' prices remain low, reflecting low
labor costs.
- In the U.S., unit labor costs remain well behaved as wages are rising
slowly. Benefit costs are rising more rapidly.
- Consumer prices rose 0.5% in January, with the core rate up 0.2%. During the past year, medical care prices are up 3.8% and higher education prices are 7.3% ahead. Services' prices in general are rising more rapidly than goods, as many services do not have competition from global competitors. Producer prices (more volatile than consumer prices) rose 0.3% in December, with the core rate showing a drop of 0.1%. (Data for January and February have been delayed due to problems at the Bureau of Labor Statistics in conversion to a new industrial classification system.)
IV. STOCK MARKET OUTLOOK …SHIFT TOWARD GLOBAL COMPETITORS UNDERWAY…VALUATION FAVORS LARGE CAP GROWTH…DOLLAR WEAKNESS FAVORS EXPORTERS
- Financial stocks exposed to the capital markets remain strong. Mutual
fund management companies, brokerage firms, and certain specialty financial
issues remain in uptrends and offer continued appeal.
- Consumer discretionary sectors such as advertising, publishing, and
entertainment should continue to perform well, along with select health care
stocks and consumer staples providers. Business services also offers
opportunities.
- Industrial equipment producers have enjoyed a strong year but values are
still attractive in transportation, as well as productivity-enhancing
process machinery. Materials producers such as chemicals and packaging
products offer value.
- Select technology stocks are appealing
as dollar weakness will likely aid export sales. Energy prices have stayed
high much longer than many Wall Street analysts expected. The world recovery
in energy consumption should support prices for quite some time to
come.
NOTE: VISIT US AT ANY TIME IN OUR OFFICES OR AT OUR WEBSITE,
www.beacontrust.com