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Market Outlook

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History has lessons to teach.

On August 15th Chief Executive Officers and Chief Financial Officers of more than 700 companies were required by the Securities and Exchange Commission (SEC) to certify that their quarterly financial statements were accurate and not misleading. By Friday, the SEC indicated that only 11 of the 700 companies required to file had failed to comply. Of those 11, none were big surprises. This should allow the markets to pay more attention to economic numbers instead of to accounting irregularities. 

Investors will not be expecting much in the way of fundamental news from corporate America until after Labor Day.  The economic data, while not robust, should encourage investors to be expecting somewhat more encouraging news from corporate America. The earnings reports coming out in the next few months should make very absorbing  reading. According to IRS data, profits bottomed in the third quarter of 2001 and have increased since; it will be interesting to see if this trend continues.

The stock market has rallied nicely from the July 24th lows. There is a trend of higher highs and higher lows. While the Dow Jones Industrials retreated on Friday, the market’s major indexes posted a third straight weekly advance, an accomplishment not seen in nine months. While many investors remain cautious there are compelling valuations, which seems to be fueling the recent rally. Corporations are returning to stock buy-backs programs and many institutions are reallocating their assets from bonds to stocks as part of a delayed investment strategy. After the recent market setback and the surge in bond prices, many pension funds need to increase equity exposure and decrease bond exposure. 

Corporations successfully placed $14.2 billion in new bond issues last week, the best week since June. This almost matches all of July when around $17 billion in debt was sold, the lowest monthly amount in seven years. This may indicate some degree of liquidity is returning to the corporate debt sector. Corporations will need to be able to be able to borrow money in order to ensure business capital investment can occur, a needed component for a sustained economic recovery. The new issues were placed at a very high yield level to ensure successful placement. Treasury notes and bonds are priced at very low yields. It will take time to build confidence both in the economic recovery and corporations, but once it returns there could be a significant price adjustment in store for various bonds.

Three Fed governors hit the luncheon circuit last week and told the world the economic recovery was on track. One governor remarked comfort with growth rates in the 3% to 3-½% range—a lower range than Dr. Greenspan cited in his Congressional testimony last month. Fed President Parry stated that the Fed’s monetary policy is exactly where it should be and the Fed shouldn’t be tinkering with interest rates, and monetary policy is very accommodative. 

The mood of corporate leaders and consumers may rest on what the U.S. does next in the war on terrorism.  The timing and success of any future action will probably be the most significant catalyst for the markets this fall. The economic recovery is closely hinged to our military policy. The price of oil already reflects a war premium. Higher oil prices can have a negative impact on economic growth. It could also affect the strength of the U.S. dollar. The Council on Foreign Relations said the Saudis, worried about a freezing of their assets, have withdrawn $200 billion from the U.S. in recent months. If other investors follow the Saudis’ lead, both the U.S. economy and financial markets could come under pressure as the possibility of war increases. 

We live in interesting times. I am sure history has many worthy lessons it could teach us. I continue to search out people that have gray hair and lines for their valuable perspective and insight. Of course, I work very hard to hide my own signs of aging but I am getting older and wiser every day. There are many investment styles and strategies; my belief is that the most successful incorporate a commitment to investing for the long haul.

 

Nancy Hadley is an investment representative with D.A. Davidson in Sandpoint.

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Nancy Hadley

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