12 Dec 2003 Ho Ho Hum

For the first part of the week market prognosticators were absorbed with the question of whether or not the Fed would remove the words “for a considerable period” from their comments indicating how long they might sustain short-term interest rates at these historic levels.  They did not.  Market watchers for the last part of the week have been focused on whether or not the Dow Jones Industrial Index would reach 10,000.   It did.

But, there was no market celebration following the Fed’s announcement Tuesday, as the Dow Jones Industrial index declined 42 points (.4%) and the NASDAQ fell 40 points or 2%.  The momentary celebration yesterday of DOW 10,000 seems over this morning as well as all the major indexes are down between .3% and 1%.

These and other actions suggest that investors believe that the strong market rally from March to June of 2003 largely reflects near-term earnings potential.  The extreme pessimism that existed during the Iraqi war was followed by extreme optimism in the wake of that war.  The last few months have been spent rationalizing those gains.  Many expect the so called ‘Santa Claus rally’ to be significantly muted this time because the market enters the winter cycle much stronger than usual.

The small-cap index and the NASDAQ index, representing primarily technology, have done very well in the last few months.  The chart below shows the NASDAQ and S&P 600 (small-cap) indexes continued to rise while the S&P 500 (large cap) advance slowed considerably after June.

It is likely that the advance of the NASDAQ and Small-Cap indexes will slow as we go into the traditionally strong winter months.  Individual stocks that represent much of the movement of these indexes have shown signs of tiring for weeks.

The economic releases from the government remain mostly positive, but erratic in their degree of ‘positive-ness.’  The University of Michigan Confidence index, just released, unexpectedly fell this month following two months of gains.  The surveyors pointed out that slower than expected job growth for the month of November likely fed fears of job security among respondents.

The uneven nature of economic reports is not new or unexpected.  As stated on numerous occasions, this recovery will likely be more uneven and less convincing than past recoveries because the economy never reached the highs in unemployment or the lows in consumer spending that are typical of this country’s economic recessions since WWII.

If the consumer is slowing a bit, we are heartened by the fact that business spending is accelerating and could be sufficient to fill the gap until consumer confidence and spending begin rising again.  Until we see strengthening in the any of these trends, the market will likely gain little.

The dollar will probably continue its slide relative to the Euro as the Fed is seen keeping rates down for months to come.  A cheaper dollar will helpU.S.exporters in all countries exceptChina, which pegs their currency to the dollar.  So for the first time in years, business could take a leadership role in the fledgling economic recovery.

While difficult to find, opportunities for portfolio growth do exist.  We seek and will own those businesses that demonstrate they can grow their earnings more consistently and faster than their peers.  As the stock averages take a breather the domestic and global economies are getting stronger.  We believe that the businesses that will lead this global recovery are significantly cheaper today than they will be next year this time and we believe we should own them now, regardless of Santa Claus.