Happy New Year!

Amidst the continuing threats of terror attacks, the War inIraq, the erosion of trust of corporate chieftains and mutual fund managers, the dollar’s continuing decline, and a host of other worries, the S&P 500 index managed the broadest advance in 23 years.  Over 90% of S&P 500 stocks rallied during the year, according to Bloomberg.  The S&P and the Dow Jones Industrials were each up over 28%, including dividends, while the technology and biotech-heavy NASDAQ was up over 50%. 

The manufacturing sector was last to join the economic recovery, but its participation is no longer in doubt.  TheInstituteofSupply Management’s manufacturing index is close to a 20-year high and should remain there as manufacturers boost production in response to improving demand.  The slight dip in the Chicago Purchasing Manager index came after the index had reached an eight year high, but it still points to continued strength.

Consumer confidence slipped a bit in December as more respondents said jobs were hard to find.  Job growth has come very slowly for this two-year recovery.  But as excess capacity is used up or obsolesced, companies have begun hiring again.  Initial jobless claims, reported this week, fell to a three year low.  Claims have been below the important 400,000 level since the end of November, which many economists believe shows job stability.

The slow recovery in jobs is due to a number of factors, of which some have been mentioned.  But perhaps most significant going forward are worldwide manufacturing competition and productivity.  With the general decline of trade barriers and quicker enforcement against illegal tariffs and national trade impediments, manufacturers face a broader array of competitors than ever before.  Businesses can no longer assume government protection from offshore competitors will save them.  Companies must produce their products faster, better, and cheaper than their competition does in order to remain profitable and to grow.  How do they do that?

Innovation and technology.  More than ever before, companies will outsource those processes in which they do not have competitive advantages, like accounting, manufacturing, data processing, or shipping.  The companies that provide these services offer excellent investment opportunities.  Further, those companies that effectively utilize their services will do what they do best and thrive.  They will devote more resources to the more profitable aspects of their businesses.  Innovators will better innovate; researchers will be more productive; and marketers will reach a broader array of customers.

The year ahead offers considerable opportunity for investors.  True, the decline of trust of corporate management, investment professionals, and the threat of terror reduce the levels of enthusiasm that might otherwise accompany this recovery.  But with almost 4 trillion dollars in consumers’ pockets, interest rates likely to remain low for months, and corporate earnings expected to grow by 11-12%, common stocks look like a very good place to be.  We believe 2004 will be a good year for our clients and wish you and yours a very Happy New Year!