Pennsylvania Investment Observer

The Recovery, Part II

by Daniel J. Nestlerode

At long last, we are finally and firmly in the midst of an economic and stock market recovery. Indeed, The Federal Reserve Board decided to raise short term interest rates by a quarter of one percent to celebrate the issue. However, if you have been following the stock market over the past few months, its performance looks more like a recession than a recovery. What is going on?

Just when we thought we knew what kind of recovery we had going in the economy, and the types of stocks that would benefit our clients with good gains, the market changed directions and began to hand us losses again. This is beginning to feel like the year 2000 all over again. There are some significant differences in the economy and the stock markets between the summer of 2000 and the summer of 2004. Economic trends are on the upswing. Sales, profits, return on equity and the firming up of corporate balance sheets have the business community feeling better and actually spending money on capital items. We, at Nestlerode & Co., Inc., are upgrading all of our computers to new Pentium IV machines with windows XP professional, after five years with the "old" system. So wither the stock market?

I've been on vacation the past two weeks and returned to the office as of July 12th. Looking at the chart of market averages, it appears that everything was fine until the first full week of July. The markets dove to their 200 day moving averages and in some cases plunged through their 200 day moving averages. In a bull market, such as we have now, the market averages will generally rally when the average drops to its 200 day moving average. If the average drops decisively below the 200 day moving average, then the markets often decline further. Today analysts at Merrill Lynch downgraded the chip industry, helping to drive the NASDAQ lower today. Blue chips rallied late in the afternoon to close higher. In all the milling around, the REIT stocks have done especially well since their setback in April. Paying handsome dividends, the REITs have been performing well while tech stocks and other shares are punky at best.

Stock prices go up, they go down and they waffle. As Dusty Springfield sang years ago, "Momma Said There'd Be Days Like This"! So the waffle continues as the economy continues to recover and the political battle heats up for the November presidential election. Throw in a little terrorism for spice and you have a recipe for indecision on the part of investors.

Yet even in this stock market, there are some stocks that are doing well. Scanning the industry groups, the REITs are performing well along with the Meat/Poultry sector of the market. I guess investors are going for low carbohydrate, high dividend stocks for now. By late fall, all of this will be far behind us and I believe we will be in another upturn in the market. In the mean time, don't get frustrated and move your investments around. You will probably just incur more trading costs and be little better off than if you did nothing.

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