30 Jan 2004 Microscope or Telescope – Things Look Good
If you watched any financial news or commentary at all this week you could not have missed the attention given to whether or not the Fed would continue to use the phrasing “considerable period” in their prepared comments. The words have appeared in their remarks for several months conveying to the financial world that they were prepared to keep interest rates low for an indefinite period to sustain a less-than-robust economic recovery. The phrase was dropped on Wednesday and replaced with the words can “be patient” before raising rates.
Words are important, but come on. It’s true the Fed put itself in a rhetorical box by implying rates could remain low indefinitely, and for that reason the term needed to go. But, due to the extreme difficulties the economy has endured over the past three years, officials obviously felt it necessary to be more overt in their communications. ‘Jawboning’ became a very important aspect of their policy once they had done all they could do with low rates.
With the words ‘considerable period’ now gone and replaced with ‘patient,’ the Fed has telegraphed the markets that they can move quickly to raise rates if necessary, but that is not currently the case, in their view. And just as the Fed prepared itself to be more responsive to a robust recovery, the Gross Domestic Product report clouded the waters at bit for investors. The fourth quarter economic increase came in at 4%, slightly below expectations of 5%. While still good growth, the message is not a ringing endorsement many hoped for.
Earnings reported this week have been very good. All of the companies in our portfolios reporting this week beat their estimates. Other names of significance included American Express, Hilton Hotels,Kimberly-Clark,TexasInstruments, Tyson Foods, Caterpillar, DuPont, Merck, NCR, and the New York Times. Nortel reported last night and gave resounding proof that the telecom revival is finally coming with a new record in earnings since becoming a public company.
Backing away form the microscope one gets the very real notion that the recovery in corporate earnings is sustainable and is broad based. Comments from managers are generally optimistic. The negative comments get the media coverage, but the vast majority of comments are upbeat on the future.
The market just got a lift as the University of Michigan reported their consumer sentiment index, which cam in slightly better than expected, but equal to the highest level since November 2000. According to the survey, the consumer feels more confident and more apt to continue spending due to low interest rates and rising home and stock prices.
And as a counter to the less than dazzling GDP numbers, the Chicago Purchasing Manager’s index rose considerably more than expected in January, showing that manufacturing in that area is improving remarkably well. The reading was the highest in 10 years, according to Bloomberg. Orders and production jumped to a 20-year high.
The big picture for investors is very positive indeed. With nearly three trillion dollars in cash accounts and interest rates and inflation low and likely to remain low, it’s hard to imagine a better long-term scenario for common stocks. But, if that is not enough, capital gains taxes are now reduced to 15% and qualifying dividends are 85% tax-free. Bonds have had their rally, houses have risen so far and fast that some talk of bubble. Yes, stocks have had quite a comeback, but this year offers potential for more of the same.
