OCTOBER 6, 2003
I. SEPTEMBER 2003 COMMENTS … STOCKS PUSH UPWARDS…BONDS SELL OFF…POSITIVE PAYROLL GROWTH…WHAT MATTERS IN THE MONTHS AHEAD
- Stock prices of small and mid capitalization companies continued
to rally in September and the rate of progress accelerated into
early October.
- Payroll employment rose for the first time in many months,
perhaps signaling a period of generally stronger jobs growth.
- While bond prices rose in September, recent signs of economic
growth and the positive employment news made bond prices fall
in the last week. The unemployment rate held steady at 6.1%.
Economists generally regard monthly payroll growth of 150,000
as needed to offset growth of the labor force due to population
growth, immigration, and college graduations.
- The recovery in employment trends may also signal a turning
point in stock market leadership. For the past year, the strongest
groups in the S&P 500 Index were the most volatile, lowest-yielding,
and lowest-price issues. Ever lower interest rates supported
those stocks that had been decimated in the three-year long bear
market. This has frustrated real long-term investors but has
provided a welcome opportunity to buy quality names at reasonable
valuations. Companies with actual earnings and dividends lagged
the index. While earnings and dividends did not matter for
the past year, we suspect such qualities will matter quite a
bit in the periods ahead.
II. ECONOMIC OUTLOOK …GDP EXPANDS IN SECOND QUARTER…CURRENT QUARTER GDP GROWTH OF 5% OR MORE…CONSUMER SPENDING RISES
- GDP expanded at a 3.3% annual rate in the second quarter,
supported by rising consumer outlays and the largest increase
in defense spending in 50 years.
- Business investment in equipment and computer software rose
8.2%. This was only the second gain in the past eleven quarters.
Despite strong sales, inventories fell, suggesting that inventory
rebuilding will support the economy well into 2004.
- Estimates of third quarter GDP growth range from 6% to 7%
although our forecast is a more modest 5% rate of gain. The primary
variable in this forecast is consumer spending, where surveys
of consumer sentiment suggest that gasoline prices and job prospects
are important influences. Gas prices are lower now and the improvement
in jobs could make our forecast conservative.
III. FIXED INCOME OUTLOOK … RATES TO STAY LOW PENDING JOBS GROWTH…INFLATION REMAINS LOW…GOVERNMENT SPENDING SURGES
- At its September meeting, the Federal Reserve kept its overnight
federal funds rate at 1%, indicating that it would probably keep
rates low pending sustained recovery in employment trends.
- Consumer prices rose 0.3% in August, as energy prices had
not yet begun to dip. September figures should make better reading.
Producer prices were also well behaved.
- Of more significance are the dollar's weakness and strength
in gold prices. Both signal caution for U.S. bonds if the dollar
remains weak and gold continues to rise.
- With defense outlays up sharply, a substantial budget deficit
looms ahead. Due to the economy gaining momentum, higher interest
rates are in the offing. A 5% rate on the 10-year Treasury looks
likely. An increase in rates of this magnitude should not necessarily
be destructive to stock prices but will definitely limit capital
appreciation in bonds.
IV. STOCK MARKET OUTLOOK … EARNINGS AND DIVIDENDS MATTER…EARNINGS REPORTING SEASON SHOULD BE POSITIVE…BUSINESS INVESTMENT IN RECOVERY MODE
- In recent weeks, quality companies with strong earnings and
reasonable dividends have begun to outperform the broad market.
We expect this trend to accelerate as earnings reports begin
to flow by mid-October. Banks, generally early to report, should
enjoy excellent earnings comparisons due to the steep yield curve
and improving business loan demand. Asset managers and gatherers
are favored by the positive stock market trend and expectations
of better employment numbers.
- Capital spending beneficiaries should extend their recent
gains, as should commodity producers of virtually every type.
Energy prices will remain high as world GDP growth improves.
- Consumer goods will see some shift in demand patterns, with
housing and autos somewhat slower, balanced by better trends
in household goods, furniture, appliances, and leisure activities.
Food products and pharmaceuticals should remain stable with
areas of strength linked to new products.
NOTE: VISIT US AT ANY TIME IN OUR OFFICES AT 333 MAIN
STREET OR AT OUR WEBSITE, www.beacontrust.com
John W. Gustafson
Senior Vice President
| 12/31/02 | 9/30/03 | ||
| S&P 500 Index | 879.82 | 995.97 | 13.20% |
| Dow Jones Average | 8341.63 | 9275.06 | 11.19% |
| Treasury Bonds (10 yr.) | 3.82% | 3.94% |
Beacon Trust Company
333 Main Street, Madison, NJ 07940
(973) 377-8090