Newsletter
April 10th, 2004
To Our Valued Clients and Friends:
I. No where fast
II. The political landscape and the markets
III. Unemployment
IV. A warning that worked
V. The remainder of the year
VI. Supplements: Our operations and website
I. No where Fast – It is April 10th, a few days beyond the end of the first quarter and the markets have little to show for their efforts during the first one hundred days of the new year. After briefly continuing last year’s rally the market indexes retreated to reflect the following performance for the first quarter:
| Dow Jones Industrial Average | -.9% |
| S&P 500 | +1.3% |
| NASDAQ | -.05% |
| Russell Value | +2.1% |
| Russell Growth | +.004% |
These near break-even averages do not reflect the volatility of the first quarter as each of the indexes rallied through mid February before beginning a long awaited correction. The NASDAQ dropped 11.3% between January 26th - March 23rd, while the Dow and S&P, which peaked on February 11th, dropped 5.4% and 6.3% respectively by March 23rd.*
While the correction neared “running it’s course” the Madrid bombing and political terrorist concerns added 2-3% to the decline in the last days of March. Although corporate earnings appear sound and the return on capital has increased by almost 40% from last year, our political situation appears to be deteriorating both domestically and in the Middle East. It will be difficult for the investment markets to disconnect from Bush’s growing domestic problems and the nightly news about the growing quagmire in Iraq.
* We are pleased with our performance for selected equities and mutual funds during the first quarter as they exceeded the performance of the investment indexes by approximately 4%-5% on average.
II. The Political landscape - This past week Dr. Condoleezza Rice testified before the 9-11 commission and I believe that her attempt at ““protective testimony” will come back to haunt the Bush administration in the coming months. Much emphasize was placed on a presidential daily briefing document (PDB) dated August of 2001 during Dr. Rice’s testimony. It is the administration’s position that this document was an historic report of terrorist activity up until that date, yet leaks from inside the administration this morning suggests that the document warned of Al-Qada activity in the United States before 9-11.
It does not matter which side is correct on this issue, but I believe that the Bush administration is about to face an ever increasing credibility gap that will be fueled by both the media and the political opposition. (If I were advising John Kerry today I would tell him to keep his mouth shut and let the administration self destruct on this issue.)
Despite the administration’s troubles and the ever-increasing problems in Iraq, the economy appears to be gaining traction with the return on equity for the S&P 500 increasing from about 10% last year to over 14% in 2004. Price earnings ratios have remained about the same as last year, even though the Dow has risen by over 30%. This suggests that earnings are keeping pace with expectations although I believe that the markets are probably fully priced until the next series of earnings announcements reveal the next turn for the economy.
III. Unemployment - Job growth appears to have finally arrived with over 300,000 new jobs being created in March, but I believe it is the increase in productivity on which we should retain our focus. It is the increase in productivity that has held job growth at bay during this recovering economy, not out sourcing.
(An interesting observation here - unemployment is about 5.6%, yet the number of individuals who are employed part-time and are seeking full-time employment adds another 4% to the unemployment number. Unemployment, and underemployment is possibly as high as 9.6%. This is a disturbing issue and if the underemployment number is not addressed this may begin to harm consumer spending.)
(Economic observation - the economy will improve, but the political landscape will continue to worsen.)
IV. The January 13th Warning that worked - Many of you received our January 13th market warning through email from our office. I have attached a copy of that warning with this letter as it correctly warned of the sudden downdraft that occurred between January 26th and March 23rd when all indexes fell between 6%-11%. The Scofield models, which are explained in the January 13th email, suggested a partial and careful reentry into the markets on March 17th. This reentry has been limited to only balanced or value oriented funds. The various models that we monitor continue to have a defensive stance with some growth models actually returning to gold. (I hate it when that happens!)
If you would like to make sure that you are receiving our market comments between quarters please direct your email address to Jennifer@Clarkfinancialadvisors.com.
V. The remainder of the year - more of the same. I believe that the remainder of the year will be a tug of war between improving economic conditions and a deteriorating political landscape. The longer we go without an attack on domestic soil the market may begin to distance itself from the political battles in Washington and Iraq. Nevertheless, the news will undoubtedly be saturated by the presidential campaign and the growing number of casualties in Iraq. As a result, I believe we must remain defensive and have modest expectations for investment returns the remainder of the year.
There is some good news in our supplement to our letter this quarter. Please take a moment to review the changes that will be occurring within our firm and our comments regarding our enhanced website. We hope you will also enjoy, and share, our new brochure which is enclosed within this package.
I appreciate your continued support and always appreciate your comments. Please feel free to call, or email us with your comments at any time. We look forward to hearing from you!
Warmest Regards,
M. Brooks Clark
MBC/alm
