Marketing Commentary- Q3 2004

What’s Been Happening?

Bonds were surprisingly strong in the past three months. As the Fed raised short-term interest rates, the market bid up longer-term bonds and mortgage rates fell. Lower long-term interest rates would be expected to presage a slower growth economy. Then again, this could just be a show of respect for oil prices that have swiftly marched above $50 per barrel.

Trends to be Aware of

Stocks have moved mostly sideways in the US in 2004, but have fared much better in non US Developed Markets and Emerging Markets. It is counterintuitive that stocks would rise in the manufacturing economies that should be more oil dependent. Meanwhile, our service-based economy slows as oil prices rise. Stock market nervousness has translated into Real Estate gains, as money chasing safety inflates a new bubble.

The unknown outcome of the presidential election of course adds uncertainty to the mix, which financial markets loathe. Regardless of who wins the election, having the process behind us will probably be positive for financial markets.

What To Expect From Here

Corporate earnings are in a holding and growing period. The further we get from the spending spree of Y2K (remember that quaint term?), the older the equipment we replaced back then gets. Corporations are holding record amounts of cash, which will eventually translate into spending either by businesses for capital expenditures or by consumers as companies spin off cash in the form of dividends.

It seems logical to expect that longer-term trends will continue to reassert themselves. The stock market’s five-year negative return is substantially below its long-term return of 10% per year (since 1927!).

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 09/30/04.