01 Apr 2005 Inflation and Oil Dominated the First Quarter

The market’s bounce in February was not enough to overcome the declines in January and March sending all of the major equity indices down for the quarter.  The Dow Jones Industrials and the S&P 500 each declined 2.1% while the NASDAQ fell almost 8%.  Bond indices didn’t fare much better as the Lehman 1-3 Year, the 7-10 Year, and the 20 Plus Year indices declined by .3%, .9%, and 1.6%, respectively.  Our models performed in line with their respective benchmarks for the quarter. 

The script of worry was long, as inflation took center stage and oil prices hogged the spotlight often.  Not surprisingly, the best performing sector for the quarter was energy.  The Dow Jones Energy Index, of which Exxon Mobile, Chevron Texaco, and Schlumberger are a part, was up 17.1% for the three month period.  The index trounced all other contenders.  A distant second and third were the Utilities and Basic Materials sectors.  The Dow Jones indices for these sectors were up 3.8% and 1.4% respectively.  Worst performing industries were networking and biotechnology.  The Goldman Sachs Networking Index was down 16% for the quarter while the NASDAQ Biotechnology Index fell 15.7%.

If the major worry in February and March was inflation, recent economic data showing may diminish concern somewhat.  The economy added 110,000 jobs in March, but 150,000 less than the month before.  Manufacturers slashed 8,000 jobs during the same period, cutting almost in half the gains of February.  Consumer Confidence declined modestly in the face of rising gasoline prices.  Gold at $425 an ounce also suggests that inflation is probably not headed much higher from here.  All these measures indicate that the Federal Reserve is less likely to raise rates any faster than they have in the past seven months.

The economy is growing at 3.8% annual pace by the latest measure.  So far high oil prices have not had much impact on slowing it down to the point of worry.  The US economy still leads global economic growth and should continue. However, it will be difficult to separate talk of slowing growth in certain areas such as housing from the perception that recession is lurking around the corner so market growth in the next few months will likely continue to be muted.   But we think our investments abroad and in industries most likely to excel should keep us ahead of market averages.