Yes, it’s that time of
year again when everyone dusts off their crystal ball and
makes attempts to predict the investment scene in this topsy
turvy world. We would hate to disappoint anyone so here it
goes:
First of all, the Dow declined 1.66% the first week of the
new year which usually indicates the trend for the whole year.
Secondly, no one gives the NFC a chance against the AFC in
the Super Bowl, and invariably, when the AFC wins, the market
declines (last year was an exception). So, we will fly in
the face of convention and predict the stock market will ride
a bumpy road to a positive close at the finish. We should
attempt to penetrate the all time high in the Dow near 11,800.
The NASDAQ may take years to approach its all time high (near
5000), but look for good gains there also.
Ready, set, hike. The Super Bowl is upon us. More wagers
are placed on this single event than on the direction of interest
rates. Last year investors were overwhelmingly convinced that
interest rates would rise, and they did – short rates
anyway. The Fed increased the Fed Funds rate five times to
2.25%. However, long rates (ten years and out) hardly budged.
Thus, long-term bond investors ended up with decent returns
last year. The Fed has already indicated there will be more
increases this year. Seems they are concerned about inflation.
The consumer price index was up 3.6% for the twelve month
period ending November. Core prices, which exclude food and
energy, rose 2.2%. The Fed has vowed to continue its streak
of rate increases to keep up with prices. So barring a major
catastrophe (terrorist attack), it is almost a certainty that
interest rates will rise this year. The Fed seems intent on
pushing the Fed Funds rate to 3%. As for long rates, look
for small increase as the yield curve continues to flatten.
We look for the economy to continue to grow throughout 2005
but at a more reserved pace. Gross Domestic Product (GDP)
should grow at a 3.25-3.50% rate for the full year. Inflation
will continue to tick upward at a slow pace. The Consumer
Price Index (CPI) should increase at 3.5% for the full year.
Many will take this as a good sign that we have pulled out
of a potentially protracted deflationary cycle without the
severe implications of a depression. Tax cuts and the Federal
Reserve’s accommodative monetary policy are primarily
responsible for this turnaround. The administration will make
every effort to extend the tax cuts, and the Fed will continue
their accommodative stance but at a slower pace. Growth in
money supply will continue to provide funds for further expansion.
We do not see our trade deficit as a problem. It is simply
an accounting issue. Europe is screaming but for the wrong
reasons. We have propped up their economy by buying their
goods. European countries are trying hard to put a brake on
consumption by their citizens not realizing that economic
success is measured by consumption, not what you manufacture.
The welfare state in Germany has resulted in a 10.8% unemployment
rate.
The flap over the declining dollar is also more politically
motivated. We would expect the dollar to rally from current
levels then settle into a trading range. Cheaper American
goods in foreign markets will also aid our economy. Those
American companies that produce most of their goods in this
country will show particularly strong earnings.
Iraq and oil are the two potential irritants to continued
economic expansion. Iraq is too hard to call, but it appears
that struggle will continue to sap our energy and recovery
somewhat. The price of oil, though recently settling back
from the $55 a barrel level, will continue to rise. However,
we do not expect this to halt our recovery as we are much
more energy efficient today and will continue to make strides
in this area. All in all, a good year but still not back to
the irrational exuberance of the 90s.
This letter will self-destruct seven days after reading.
Random thought for January 2005:
More trouble in Ohio. Ohio is not the 17th state admitted
into the Union, but the 47th, as Congress forgot to vote on
the admittance resolution until August 7, 1953.
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