US markets near two-year highs

US Markets leap forward with a big surge on Monday, leaving some parties believing that a strong move early in the year indicates another strong year for stocks. The DOW jumped forward 134 points (1.29%), the S&P up 13.74 (1.24%) and the NASDAQ gained 41 points (2.03%), building on the strong gains delivered over December. We believe 2004 will be a great year for equities but not because the DOW had a good day on Monday, or even a good week. Bottom line for 2004 will be the low interest rate policy of the US Federal Reserve which has now really started to produce solid economic results. The short term Fed Fund Rate has been at 1.00% for some time and is likely to stay there for some time.

Consensus has the Federal Open Market Committee holding rates pat until spring and our estimates don’t see the short term rate climbing over 2.5% by year end. To gain some perspective, an overnight rate of 3.5% to 4.0% would just get the FOMC to a neutral position. The US low interest rate policy coupled with the Bush tax incentive plan and massive spending on the war on Terror have laid a foundation of economic stimulation which will clearly carry forward throughout 2004. The recent ISM report published great economic performance figures for the United States, many of which are the strongest in 50 years. Add to that, the greenback hit 1.2742 against the Euro on Tuesday, further stabilizing the US trade imbalance and improving USA competitiveness in foreign markets. At Investments International, we definitely favour equities moving forward and recommend from a global view, an over weighting in US equities. The low dollar, low interest rate, strong tax incentive policies of the USA will give rise to a focus on Corporate USA earnings which will become the dominant story for the year.

US GDP should exceed 4.5%, leaving the stronger growth sectors, particularly technology and health care open to growth in the 10% range. We expect the manufacture sector to show double digit gains as well with exports growing at 20% to 30% for US manufacturers. The better performing companies in those sectors should then be able to deliver stellar performance leading to what we hope is a solid growth in cash flow and earnings for corporate America. As well, stronger companies in Europe which can capitalise on the global situation will do well as well. More money in Corporate America will lead to more jobs, the jobless recovery being the only grey cloud still hanging on. We note that US corporate earnings exceeded 1.0 trillion USD in the third quarter, the highest figure ever. We mentioned in previous articles the USD 800 billion in cash on the corporate books plus 300 billion in bond issues and 300 billion in new cash flow leaves Corp. USA cash rich. We also note that disposable income for US households rose 6.3% for the third quarter as well. Simply put, companies have more money and households have more money. Consumers have proven over the last few years their desire to spend money on lifestyle. This is not going to change. Thus the stage is set.

The facts are; inflation is not a concern, cash deposits will deliver less than 0% real rate of return (factors in inflation), bonds are at this stage of economic movement risky investments (unless holding to maturity) and real estate has already made its strong move. By default as well as economic fundamentals, equities are the favoured asset class for 2004. Another positive factor playing on the US market is the presidential election later this year. Statistical review indicates a 15.8% average index growth for the year leading into a presidential election. To offer a note of caution, excessive optimism could lead to over indulgence in the markets. Taking strong value based investments in the blue chip stocks and/or defensive sectors coupled with selected key positions in the leading growth sectors of technology and health care should yield very good results during the next stages of this economic recovery.

For more information on investments strategies or global economic data, see our website at www.investments-intl.com.  Or, call me at 633-7116 or email darcy@investments-intl.com for more information or to get our current recommendations on equity investment products. The information provided in this communication is not to be construed as an offer or the solicitation of an offer to buy or sell the securities displayed or discussed. The securities mentioned although registered in their country of issue may not and likely have not been registered for distribution in your jurisdiction or country of residence by the appropriate regulating government authority. In addition, the information included is not intended to be advice nor should it be construed in anyway to be advice, nor is the Company registered as a financial advisor in your jurisdiction.

Darcy N Carr, CEO
Investments International
darcy@investments-intl.com