Good Economic News Fails to Excite Investors, So Far

Corporate earnings for the first quarter of 2004 released to date suggest a favorable trend is developing.  As of today, 242 companies of the Dow Jones US Total Market Index have reported and are up and average of 28%.  This total represents less than 15% of 1,632 stocks in the index, but if the trend continues, first quarter 2004 results will compare well with the 24% average gain of S&P 500 fourth quarter 2003 earnings. 

Industries leading the earnings charge so far this year include semiconductors, casinos, oil drilling, heavy machinery, aluminum, and Internet services.  Fourteen semiconductor companies reported an average 629% increase in earnings over the first quarter of 2003.  Semis indicate growing strength in the manufacturing economy as they are an essential component in so many goods today.

Economic reports are mostly favorable with a few negative surprises sprinkled in to keep the forecasters honest.  The big surprise of the week was Retail Sales, which rose 1.8% in March.  It represented the biggest increase in a year and doubled economists’ estimates.  Excluding autos, sales jumped 1.7%, the biggest increase in four years, after a 0.6% rise a month earlier.  The news caused bond prices to fall and the dollar to rise.  Stock prices fell as investors worried that the Fed would begin raising rates sooner than earlier thought.  However, this Fed has proven anything but reactionary.  Members continue to indicate that they remain patient on rates and do not see any immediate threats of inflation.  They stress that they want to see real and sustained improvement in employment before changing policy.  A month or two of good numbers do not qualify in their view as sufficient.  The markets likely over-reacted.

The Empire State Manufacturing Survey indicated that conditions for New York manufacturers continued to improve significantly in April.  The general business conditions index rose to 36.1 from 25.3 in March with employment indexes increasing markedly.  Manufacturing in thePhiladelphiaregion also expanded at a faster pace than expected this month according to the Federal Reserve.  A number greater than zero means a higher percentage of manufacturers surveyed reported that business improved rather than deteriorated.  The index reached a 10-year high of 38.8 in January and has been greater than zero since June.

TheUniversity of Michigan just released their preliminary report on consumer confidence for April and it fell for the second time in three months.  Apparently a good jobs report earlier in the month failed to offset the negative impact of higher gasoline prices, increased violence in Iraq, and nasty campaign rhetoric and charges.  But the disconnect between actual spending and survey responses is nothing new in this recovery.  It seems that survey respondents continue to say one thing and do another.  Their spending habits, virtually across the board continue to defy economists’ expectations.

Our attention will be focused on earnings releases in the coming weeks for surprises and any new trends that may be developing.  So far the early results are in line with expectations.  Our thesis for continued economic recovery and out-performance of equity markets relative to alternative investment vehicles remains in tact.