Issue 13 - March 2, 2004

2004: An Encore Performance?

While financial pundits discussing the current market rally will point to October 2002 as the beginning, it is important to remember how the market looked this time last year when we came within 3% of retesting those lows.

What a difference a year makes?

Interest rates in March of 2003 were not materially different than we see today with Fed Funds at 1.25% versus 1% and 10 year US Treasuries at 3.67% versus 3.99%. The dollar has fallen from 1.08 EUR to 1.24 EUR, a decline of 15%, and the unemployment rate has fallen from 5.8% to 5.6%. When we consider these current factors, the market outlook, while not terribly dynamic, looks to be reasonably favorable. However, given these very similar facts last March, the market forecast was far from the 39% gain the S&P managed to post for the balance of 2003.

So what’s new?

Obviously equity valuations have risen and the gloom from a protracted bear market has morphed into a positive consensus. But we are still living with the trade deficit, the federal deficit, and the war on terror, all of which were present in 2003. Core inflation continues to be low, running around 1%, and we are seeing substantive, continuing improvement in corporate earnings and profitability. The Federal Reserve has shifted ever so slightly in the direction of higher rates, but this is an election year and it will likely take a number of satisfactory employment reports to spur them into action. The following chart highlights the gap between job creation expectations and economic growth. Many factors have led to the lackluster improvement the chart highlights, but first and foremost is that business are still cautious having just clawed their way out of the worst profit recession ever known.

A Graceful Fed?

While the investing backdrop remains attractive, we are mindful that the longer the Federal Reserve remains on the sidelines during this period of economic expansion, the more difficult it will become for them to gradually and gracefully raise rates. The bond market is priced well beyond perfection and the slightest suggestion of fiscal reality will likely provoke a short-term spike in both short and long rates. The fallout of these volatile periods will likely spill over into equity markets, but given rates are so low, we can afford substantially higher rates before policy could approach becoming restrictive. Finally, it is important we appreciate the difference between periods of consolidation which are normal and expected and any substantive change to the dominate, underlying economic themes: low interest rates and healthy corporate profits.

In this Edition

  • 2004: Encore Performance

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

12 - 02.03.04
Market Outlook/Cell phones

11 - 12.16.03
Auctions - eBay, US Treasury, IPOs

10- 12.02.03
Recent Economic Data
Market Implications

More Past Issues
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Market Highlights

  3/01/04 12/31/03 12/31/02
DJIA US 10678.1 10453.9 8341.63
S&P 500 US 1155.96 1111.92 879.82
Nasdaq US 2057.80 2003.39 1335.51
EAFE Int'l Equity 1354.47 1288.77 952.65
5 Yr Treasury 2.95 3.231 2.74
5 Yr AAA Muni 2.2 2.45 2.59
10 Yr Treasury 3.985 4.225 3.82
10 Yr AAA Muni 3.350 3.6 3.72
30 Yr Treasury 4.771 5.01 4.77
30 Yr AAA Muni 4.35 4.54 4.69
EUR Currency 1.2471 1.2612 1.0488
JPY Currency


106.92 118.69
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