Marketing Commentary- Q4 2004

Posted by on Dec 30, 2004 in MFA Quarterly Commentaries

What’s Been Happening?

The dollar continued to fall relative to the Yen and the Euro, adding a tailwind to the returns from International funds. Meanwhile, easing oil prices put domestic financial markets more at ease and the US Stock Market earned 90% of its 2004 return in the past ninety days. Three months ago, markets fretted over the presidential election. As expected, stocks rose after the election uncertainty ended. Despite a backdrop of war, terrorist threats and an uncommon human disaster in Asia, financial markets had a normal year. Broad expectations for higher long-term interest rates in 2004 did not materialize and Real Estate Securities delivered another year of outsized returns.

Trends to be Aware of

Common thinking has become too comfortable around the two ideas that the dollar will fall and long-term interest rates will rise. Should expectations change on those themes, prices will do some adjusting.

Ultimately, prices follow profits. Despite a large gain in US Stock prices from the March, 2003 lows, this bull market is still young by historical standards. Once prices begin to recover, bull markets have lasted an average of 41 months. Dating this recovery back to October of 2002 would mean we are only in month 27. Meanwhile, profits on the S&P rose 24% last year while the S&P rose just 8%. Dividends added just over 2% to the total return of the S&P 500 in 2004.

What To Expect From Here

All trends eventually hit a wall. The dollar has dropped so far that at some point we expect that pattern to reverse. Meanwhile, US manufacturers and exporters will gain some traction from a weak dollar. US corporate profits are growing faster than stock prices. If profits continue to grow, we expect prices will rise. It would be logical to expect large company stocks to begin to catch up with small company returns.

Some Numbers for Comparison:

The following table compares the main indices against which fund performance is measured. All figures are for the periods ending 12/31/04.

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 Financial
Real Estate Inv Trusts
Real Estate
Lehman Bros. Ag Bond
Source:  Thompson Financial