Portfolio Management > Market
The Year of Recovery
After suffering through the worst bear market in history
during the last three years, the market finally began its recovery in 2003.
Despite a slump early in the year over concerns about the war in Iraq, the
Dow Jones Industrial Average closed at 10453.92, a gain of 25.3%. That compares
with a gain of 25.2% in 1999, the last winning year for any major index.
For some investors, the return to 10000 level was small consolation.
The DOW, after all, crossed 10000 early in 1999, meaning that even after its
rebound of the past 15 months, there has been little progress in well over
4 years. For many investors, however, the recovery from the five year low hit
in October of 2002 was such a relief that the lack of progress over the long
term didn’t matter.
This year’s recovery has brought the DOW a little more
than halfway back to its record high of 11722.98 hit four years ago, in January
of 2000. Rightly or wrongly, the main question on people’s minds today
is no longer how far stocks will fall, but how high they can rise.
As we have mentioned in our previous letters, the combination
of low interest rates, low inflation and tax cuts accompanied by a lower dollar
has restarted the U.S. economic engine. This month we received an especially
encouraging economic report when the Institute of Supply Management announced
that its index had reached a 20 year high. What this index suggests is that
the current growth in production should continue throughout at least the first
half of 2004. This news bodes well for jobs, for it could be the key for how
quickly the employment picture improves during the remainder of the year.
All in all, it appears that the economic fundamentals strongly
suggest that the growth rate of the economy for all of 2004 should remain at
or near its full potential. We believe that inflation should remain tame and
that the outlook for corporate profits looks positive. What we see taking shape
for 2004 is an excellent economic climate in which to be investing in equities.
There will however be some cross currents throughout the year. We do believe
that interest rates will begin to rise in 2004, albeit slowly. In a rising
interest environment, it is reasonable to expect that the market will tend
to pause every once and awhile to reassess the economic landscape. This could
be just one of those times.
As of this writing, the S&P 500 has closed higher for
nine straight weeks, a fairly rare occurrence. The last time was way back in
1989. After a minor pullback in 1989, the S&P 500 made minor highs and
then went into a fairly lengthy consolidation. Another concern of ours has
been volume. Volume has been very high during January, as it appears investors
are throwing money at the market. While we like to see high volume levels during
market rebounds coming out of a major correction or bear market, we do not
like to see consistently high levels after a major advance. When we look at
the last times volumes spiked after a major advance, April 1996, January 1997,
it resulted in a correction of 13% and 12% respectively. This does not mean
that we think the recovery is over, but it does give us pause. It does appear
that the initial rally is almost complete and correction is near.
However, with the economic fundamentals as strong as they
are and this being an election year, we believe that 2004 will be a good year
for equities and that corrections should be taken advantage. As of this writing,
our portfolios are in a position to take advantage of any market correction,
the first of which we believe should happen in the first quarter of this year.
This should provide us with a low risk entry point. Until the market corrects,
we continue to maintain our cautious stance.
As always, your comments and questions are appreciated.
Anthony J Amaradio
Paul E Bozymowski
through Securities Equity Group
Member NASD, SIPC & MSRB
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