What’s Been Happening?
While we collectively hold our breath, pondering developments in politics and terrorist tactics, financial markets have taken a breather. The U.S. Stock Market advanced modestly for the quarter, at least that’s what a positive return of 1.71% feels like after the volatility of recent years. Bonds and Real Estate securities lost ground as the spectre of rising interest rates provided their first real headwind in recent memory. Emerging Market stocks, as a broad category, fell hardest in the recent quarter but remain well ahead of levels of two years ago.
Trends to be Aware of
Technology companies tend to be too optimistic, producing too much in good times. According to the NY Times, some bellwether technology companies have built their inventories up substantially Year over Year (YOY – 3/31/03 versus 3/31/04). The high levels of valuation and inventory could mean tough sledding in technology.
|
Company
|
YOY Inventory Increase |
Current P/E Ratio |
|
Dell |
+61% |
32 |
|
Cisco |
+47% |
32 |
|
Intel |
+29% |
26 |
What To Expect From Here
Are markets idling along toward a launching pad or the edge of a cliff? We don’t think it is either. Earnings have continued to improve, generally exceeding expectations. Dividing the earnings of the S&P 500 by current prices gives us an earnings yield of 5.5%. This is attractive compared with the 4.5% yield of ten-year treasury bonds, but not a screaming buy. Patience will pay off. Even at a quarterly earnings rate of 1.71%, money doubles in just over ten years.
Some Numbers for Comparison:
The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 06/30/04.
|
Index |
What it Measures |
Last 3 Mos. |
Last 12 Months |
3 Years, Annlzd |
5 Years, Annlzd |
|
Standard & Poors 500 |
U S Stocks w/div |
1.71% |
19.1% |
-0.70% |
-2.21% |
|
Russell 2000 |
Small Stocks |
0.47% |
33.35% |
6.23% |
6.63% |
|
Morgan Stanley EAFE |
Foreign Stocks |
0.44% |
32.85% |
4.25% |
0.40% |
|
MSCI Emerging Mkts |
Emerging Mkts |
-9.57% |
33.51% |
13.10% |
3.27% |
|
Thompson Financial |
Technology |
-0.54% |
24.34% |
-9.76% |
-9.29% |
|
Real Estate Inv Trusts |
Real Estate |
-5.81% |
26.95% |
15.33% |
14.49% |
|
Lehman Bros. Ag Bond |
Bonds |
-2.44% |
0.33% |
6.36% |
6.95% |
|
CPI |
Inflation |
0.91% |
2.94% |
2.04% |
2.62% |
