By Gil Knight , US fund manager at Govett As 2001 mercifully ended, the thinking was that invest...
By Gil Knight , US fund manager at Govett
As 2001 mercifully ended, the thinking was that investors in US stocks would have a chance to breathe a sigh of relief and once again regain some hope and anticipation for better returns in 2002.
So far, however, this has not been the case, for both January and February were disappointing months.
For the first two months of the year, the Dow Jones Industrial Average returned 1.18%, the S&P 500 -3.38% and the Russell 2000 Growth -9.80%.
Technology stocks, which enjoyed a dramatic fourth quarter of last year, were pummelled early this year, although a few fairly impressive trading days occurred early in March.
The causes of the market's poor start include fears of a prolonged US recession, Enronitis caused by greedy executives, turmoil in the Middle East, telecoms bankruptcies due to lack of available debt funding and, finally, patchy earnings releases and forward guidance by leading US corporations.
Investors looked at their 401k savings accounts (Isa equivalent) and asked what happened, and a normal period of heavy January/February cash inflows into equity mutual funds turned into one with very light inflows.
Investor spirits were quiet but no one told the US consumer, who has truly prevented a capital spending recession from becoming a fully-fledged spending recession. Housing construction and home sales have held up well, while retail sales also remain strong, and the zero percent financing programme on cars is still available, although some buyers find the offer is only on select issues.
Further signs of an economic upturn finally kicked in towards the end of February, signalling that the recession could well be over and that shares will finally begin to perform better.
Politically, the US Congress is back to partisanship, although Bush's approval ratings remain high and the public seems pleased with his warrior appearance. Afghanistan is still far from settled and the big issue is how the war against terrorists will be conducted on a strategic basis.
Looking ahead, the exceptional volatility in the stock market will continue, and stockpicking and industry selection will assume more importance. Industry rotation should prove more prevalent this year as money managers try to capture performance wherever possible.
The US economy could indeed pick up in the second half of the year, leading to the use of more cyclical stocks in basic industry, consumer cyclicals such as retail and home furnishings, as well as speciality chemicals and specific segments of technology.
The good technology stocks include semi-conductor, military routing, surveillance, technology of smart bombs and related defence equipment. Bad techs include most software companies, new economy stocks and anything to do with telecoms.
The theme for this year is improvement in stock investors' fortunes, although it will not be across the board. The major indexes could be modestly up for the year on the order of 1% to 5%. Not very exciting, but some good stock picking could improve those results.
US interest rates should remain low.
Consumers continue to spend, housing is strong.
Dollar to remain strong and GDP expanding.
Stock market selling at high valuations.
Consumer debt levels still high.
US steel tariffs still troublesome.
£300bn of liabilities
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