19 Nov 2004 Stormy Policy Debates Loom
Stocks on average were slightly down this week and headed for the first down week in four. Fears about inflation fanned by the Producer Price Index on Tuesday and the Consumer Price Index on Wednesday weighed on investor enthusiasm. Mid-week, however, Housing, Industrial Production, and growth in jobs provided good news, lifting stock prices.
Over 85% of companies have reported their third quarter earnings and are about 18% ahead of the third quarter last year. Among the leaders were metals, forest products, containers and packaging, and Internet services. As you might expect, stocks among these industries have had the best returns. The steel index is up 100%, Internet stocks 92%, and Oil & Gas 81% over the past twelve months.
As alluded to in earlier Briefs, investors are looking beyond the mostly good company-level news to worry about unanswered questions regarding issues such as the deficit, the decline of the dollar, inflation/deflation, tax reform, tort reform, Social Security, and Medicare.
While markets seemed pleased in the weeks following the election that Mr. Bush won the White House and Republicans control Congress, they are now sobering up to the realities that significant questions remain about what can and will be done to address these issues and what will be the cost? One thing seems clear though; Mr. Bush is securing a Cabinet that he thinks will be storm and mission-worthy. Rough seas are likely ahead for the Administration and Congress as they grapple with politically thorny issues, rife with noisy and skilled lobbyists and special interests. The President wants no loose canons during this watch as he seems to be mission focused on correcting some problems that have gone too long unaddressed.
Our market experts remain positive on the near-term for stocks, but they point to weakness beyond January as policy measures highlighted above are debated in the public forum. We are long-term investors and believe that equity markets promise very good returns going forward. But we recognize the need to manage risk in the short run. In that endeavor our portfolios are well diversified across economic sectors, regions, and countries. In as much as investors are more sensitive to stock disappointments, we are quicker to realize losses when they occur than we were in the past. We are also less likely to hold stocks that demonstrate high volatility before or after purchase. Stock valuation plays a much greater role in our selection and holding criteria than it did in the past. Finally, growth of earnings is still important, but it has taken a secondary role in light of increased uncertainty in the global economies.
We are anxious to learn what measures will be taken by government in the coming months, but we believe long-term global trends are improving for equity investors. In Briefs to come we will be discussing some of these issues as to the risks and opportunities they pose for us.