While Mickey, Minnie and the gang won’t be on the ballot on Tuesday, many believe they are no better than who is running for office. We shall see early on Wednesday whether President Bush retains control of Congress or the Democrats take either/both the House and Senate. Investment implications have been bandied about; however in the long run, the economy wins out and on that score, we continue to look rather slow. If not for a robust employment report, investors would be fretting about recession. However Friday’s employment – after revisions – indicated job growth remains strong. It seemed to be the outlier in an otherwise dour week of economic data. The report from suppliers indicated a slowing, inventories are building and (good news) prices are declining. Retailers are already geared up for Christmas, however their sales are tracking below expectations with Wal-Mart forecasting flat comps for the first time in 10 years. If consumers are indeed beginning to save (as the data indicates) then we could expect some “flow through” to earnings and a contraction in historically wide margins. To whoever wins on Tuesday – let’s make it a better place!

Judging by the commentary last week, you’d think a bear market has broken out on Wall Street. Six straight days the Dow has declined, but barely 1% in total decline. Not what would normally be called even a minor correction. Little serious damage has been done to the current rally and investors may use the election as an excuse to do more buying once the results are known. The technical picture of the markets has begun to deteriorate some, but it is inevitable, as the markets have been overbought for so long. One bright spot has been the weak openings and stronger closings of the markets, indicating that investors are trying to accumulate shares. For much of the past two years, the markets have been marked by strong opens and weak closes – a sign of distribution. While this new trend doesn’t mean the markets will once again surge higher for the next month, it is one sign of a change in the markets. The rally from July may have been our year-end rally, only a few months early (like Christmas advertising!). We will watch the remainder of earnings season as well as comments from retailers regarding the sales season to see how the consumer is reacting to a slowing economy and lower oil prices.

The yield inversion was getting rather steep before Friday’s employment report, however once released, the bond yields rose dramatically and a sure rate cut by March ’07 became more wishful thinking. While the equity market has been sailing through calm waters, the bond market has been a bundle of nerves, responding to each economic report either aggressively selling or buying bonds. The bond model remains positive, still indicating lower yields ahead, but the sharp rise (again) in commodities may turn the model negative in the weeks ahead. For now, our reading of the economic landscape is a still slowing economy with modest inflation that still risks a “hard” landing. We still view bonds as decent competition to equities and should provide similar returns over the coming 3 to 5 years.

© 2006 Paul J. Nolte, CFA
Editorial Archive

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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Paul J. Nolte, CFA
Director Investments
Hinsdale Associates
630-325-7100
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