News & Insights
Will the Good Times Keep Rolling in 2004?
What a difference a year makes. As 2002 ended we were encouraging clients to stay invested in stocks, assuring them that their risk-taking would be rewarded over time. It was great to end the three-year drought in returns on the stock market for 2003. A diversified approach has worked well, as not all of the attractive investments were in the S&P 500. In fact, smaller companies, foreign shares, high- yield bonds and real estate investment trusts provided healthier returns than the blue chips. Commodities, as shown below, did well through November 30, 2003. Here are some benchmarks:
Year -To -Date as of November 2003
Vanguard S&P 500 Russell 2000 Vanguard REIT Vanguard Total Merrill Lynch GSCI Total Return
Index Fund Index Index Fund Int'l Stock High-Yield Index
Large Stocks Small Stocks Real Estate Index Fund Bond Index Commodities
22.1% 44.3% 31.6% 30.2% 24.3% 12.5%
Information provided by Litman/Gregory and StockCharts.com
Investing After the Recovery
Our economic recovery seems well underway with business activity picking up and stronger consumer spending. Currently, we see no barrier to the continued improvement in economic conditions. Leading economic indicators now show clear sailing for the next six months or so. We continue to recommend that investors position themselves to benefit from a recovering U.S. and global economy. However, after providing tax cuts and historically low interest rates, policy makers do not have much to work with should a shock send the economy south.
Pessimists rightly point to looming government deficits as well as high household debt. These could be barriers to further good times. While acknowledging the risks, we believe a prescription of liquidity and low rates is working and that markets should continue to trend higher. The next challenge for the U.S stock market will come when the Fed begins to raise interest rates and bonds become a bit more attractive relative to stocks.
We also believe that the dollar has more room to drop vs. the Euro and the Yen. If the devaluation happens in an orderly fashion then the big risk of a weaker dollar, that foreign investors will abandon U. S. investments,should be muted by the positive effect that a lower dollar should have on U.S. manufacturing.
Investors may see higher inflation, moderately higher interest rates and a falling dollar.
What This Means for Investors
Through December 24th the sectors that have led the advance were Technology (up 44%), Consumer Discretionary
(up 34%) and Materials (up 32%). The Financials (up 25%) have benefited greatly from lower interest rates.
In our view, there is now room for the more defensive sectors such as Health Care (up 12%) and Consumer Staples (up 8.0%) to surprise on the upside. Great companies such as Pfizer and PepsiCo look attractive. Industrial names such as GE should benefit from the rebound in manufacturing. Energy and Basic Materials shares should also continue to do well as global demand for raw materials and oil increases. The rise of China as a new consumer society should insure this increase in demand is more than just a cyclical rebound. Materials and resource-based shares are also a good wayto hedge the risk of a falling dollar. Small-Cap stocks, such as those in the Russell 2000 and the S&P 600 should continue to outperform the larger stocks until monetary policy begins to tighten.
We continue to recommend exposure to both the developed and emerging markets. Within the EAFE index of developed countries’ stock markets, Japan and Germany represent good turn-around stories. Emerging market shares continue to be attractively valued relative to U.S. stocks and should be included in a broadly diversified portfolio.
With a forecast of higher interest rates and an expanding global economy, it is hard to work up any enthusiasm for bonds. The most vulnerable securities are long-term Treasuries. We think corporate bonds should continue to outperform government bonds. Municipal bonds should perform better than Treasuries. High-yield bonds should continue to do well, however, they are closer to the end of their cycle than the beginning.
Real Estate & Commodities
REITs have been one of the delightful surprises of 2003, with a total return of over 30%. The average yield on these investments is over 5%, good for income hungry investors. While their recent advance has chilled our enthusiasm a bit, REITS should still be considered as part of a diversified portfolio. The trend in the prices of commodities such as crude oil, natural gas and metals should continue higher after a breather to digest 2003 gains.
The Altavista Investment Team - Winter 2004