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Follow Through
The markets put on a great show for us in the last quarter of 2002. All in all, the markets ended up negative for the year. However, the action that brought us to the close was relatively encouraging.
The first half of the year was a steady decline as the effects of September 11th were felt throughout the economy. Our recovery was slowed significantly and, even though we didn’t fall into a “double-dip” recession, we certainly flattened out in our economic development. Around mid-year, we began to find some footing. The global economies stabilized and the Federal Reserve Board (The Fed) once again lowered domestic interest rates in an effort to stimulate the revitalization. The markets came off their lows and finished the fourth quarter with a decent gain.
At this point, we’re looking for follow through in the markets and some semblance of strength in our economy. The markets started 2003 in positive fashion but were immediately sold off when 4Q economic data showed the economy to be weaker than expected. At this point, we’re a bit concerned that we may be setting up for a “double-dip” recession and new lows in the market. The run we got off the October lows was encouraging but we’re simply not getting follow through to this point. Further, it appears to us that war with Iraq is a foregone conclusion and this certainly won’t help strengthen our economy. In fact, it will most likely weaken the, already fragile, global setting.
Going forward, we’re going to be VERY focused on the follow through, or lack thereof, we see in our economy. If things don’t continue to improve, it would have a very bad psychological effect on consumers and our markets. The markets look stronger than they did in 2002. But, without economic recovery, the mentality of most investors will most likely deteriorate further.
There are several economic factors we think will be critical in 2003:
1. Job Growth/Unemployment – To this point, we have seen a jobless recovery. Corporate America has continued to lay off workers and they’ve been unwilling to create new positions. Keep in mind; unemployment is a lagging economic indicator. Thus, as the economy continues to recover, unemployment will often times continue to rise. However, at some point, we need to see job creation.
2. Capital Spending – It’s pretty understandable that, since the economy is so soft, corporations have been unwilling to spend their capital. However, at some point, we need to see corporate spending hit this economy. For too long, corporations have been meeting their earnings numbers via continued cutbacks. At some point, the economy needs to be pushed by new business creation.
3. Consumer Confidence – We’ll go ahead and file this one under the “duh” file. It’s pretty obvious that if investors lose too much confidence, it can have a long lasting effect on our economies and markets. An extension of this would be Retail Sales. One of the factors that kept us from experiencing a “double-dip” recession in 2002 was consumer spending. If retail sales fall off, we may have issues.
In closing, let me say that we’re very cautious right now as it relates to our economy. At some point, we need to see continued economic improvement and stability to break us out of the bear market that’s plagued us for three years. We’ll let the economy dictate whether or not we keep our current investment positions though the entire year. Last, the wild card will be the war with Iraq. These types of wars can be very unpredictable but we’ll adjust the portfolios as needed. |
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