The market continued to prove the pessimists wrong as it hit new levels last seen in September 2008. The major indices trended modestly higher for most of the week but sold off of Friday. In the end, the Dow closed up 1.10%, the S&P 500 gained 0.86%, and the Nasdaq rose 0.29%.
Source: MSN Moneycentral
We received mostly good economic reports this week indicating that the economy is still in growth mode. Industrial production continues to rise, leading economic indicators are still positive, and the Philly Fed index was positive. Two reports issued this week, the Consumer Price Index (CPI) and Producer Price Index (PPI), showed little signs of inflation. A negative report showed housing starts fell by nearly 6% in February, which means homebuilders are building less homes and apartment/condo buildings. We don’t necessarily see this as a bad thing and hopefully the housing market can find some equilibrium soon.
Of course, the big news of the week came out of
Instead we will focus on its impact to your investment portfolio. We are already seeing companies like Caterpillar claim costs of $100 million in the first year alone. Obviously these costs will impact their bottom line, making their stock less attractive. If this is indicative of the new costs businesses will face, we could be in for a long period of subdued returns in the stock market and in your portfolio.
Besides the costs to businesses, a multitude of taxes on individuals will be raised to pay for this bill. We are already worried about the expiration of the Bush tax cuts, and the new taxes layered on top have us very concerned. Under these conditions, though, municipal bonds become more appealing. These bonds are exempt from federal tax, and the income received from them does not count to overall income. That could prevent an investor’s income from putting them in a higher tax bracket. For smaller portfolios, muni bond mutual funds or ETF’s can provide a nice diversification, while larger portfolios can consider individual muni bonds. Muni bonds are already a popular investment choice for high net worth investors, but their appeal may become more widespread in the coming years.
Most of the focus next week will likely be on the healthcare bill, but there are a few economic reports we will be watching. Home sales and durable goods reports come in Tuesday and Wednesday, and Friday we get the final revision of the fourth quarter GDP number. Little change is expected in these reports, but as always, we will be keeping our eye out for and surprises.
Where are we investing now?
With the passage of the healthcare bill, we may get a jump in the stock market. The market hates uncertainty, and the passage of the bill, no matter how bad it is, will end the uncertainty. Healthcare sector stocks may get a boost as well, for the same reason. These stocks have had a nice run recently, but we are reluctant to venture into this sector since there is too much government involvement for our comfort. As we have seen in the past year, the government likes to change the rules of the road when it deems necessary, and it usually comes at the expense of the investor.
For the overall market, we remain optimistic in the short term, but cautious. As we have said in past reports, the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us worried for the longer term.
There is no change in our investment strategy this week. In fact, last week we made zero transactions. No purchases and no sales, just riding this rally. We would like to put some money to work on a pullback, but a good opportunity has not presented itself. Anyway, in equities we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe that government policies will weaken the dollar in the long term. TIPs continue to be a favorite, as we expect inflation to increase in the future, despite being tame at the moment.
