Marketing Commentary- Q1 2005

Posted by on Mar 30, 2005 in MFA Quarterly Commentaries

What’s Been Happening?

Like last year, 2005 has begun with a losing quarter for the major stock indices. Smaller company stock funds fell more than Large Company Stocks, reversing the trend of the past few years. The dollar has begun to recover, especially versus the Yen. International Stocks managed to overcome this currency headwind in the past three months to deliver positive gains, but the margins of recent out performance appear to be shrinking. Real Estate funds (REITS) and commodities funds fell sharply in the first quarter. The perception might be that the easy money has been made in these two asset classes and is now flowing elsewhere.

Trends to be Aware of

The biggest financial story today is the rising cost of a barrel of oil, approaching $58 as we write this. Energy costs are high and rising and much is made of the price at the pump. What is less well understood is that our (US) energy costs (gasoline, fuel oil, natural gas and electricity) as a percentage of personal disposable income are in the low range of their historical average – about 5%. That percentage reached over 8% in the early 1980’s and, except for two months in recent years, have never fallen below 4%. Adjusting for inflation and the rise in incomes, oil price becomes less of a pivotal factor. Oil would have to exceed $90 per barrel in order to account of 8% of personal disposable income. Fuel efficient, hybrid cars such as the Toyota Prius are in high demand.

What To Expect From Here

Stocks are reasonably valued today at a Price/Earnings Ratio of 16 (for the S&P 500). But cash on the balance sheets of these corporations accounts for 21% of their value, a near record high, and well above the long-term average of just over 15%. Adjusting for high cash levels makes the P/E closer to 13. By that metric our stock market is cheap, especially considering the low interest rate alternatives such as money markets and high quality bonds.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 3/31/05.

What it Measures
Last 3 Mos.
Last 12 Months
3 Years, Annlzd
5 Years, Annlzd
Standard & Poors 500
U S Stocks w/div
Russell 2000
Small Stocks
Morgan Stanley EAFE
Foreign Stocks
MSCI Emerging Mkts
Emerging Mkts
Thompson Tech/Comm
Real Estate Inv Trusts
Real Estate
Lehman Bros. Ag Bond
Source:  Thompson Financial