The year is nearly halfway over. As such, we thought it might be instructive to reflect on the progress, gains and losses so far in 2004. Much to many people’s surprise, the markets have made scant progress over the previous 6 months. Indeed, many of the key factors we observe closely are just about where they were at 2004’s beginning:
1) Major U.S. Markets: Most apparent are the major indices: As of Friday’s close, they are within a % (or two) of where they started the year – Its as if the first 2 quarters of the year never happened.
Do Over: The second half allows investors to (once again) try to catch an early part of a Bull leg up;
2) Economy: First Deflation, then Inflation. As the stimulus faded, initial fears were that a deflationary cycle was about to occur. When that failed to materialize, the new fear was that the economy was getting too hot to handle, with inflation rearing its ugly head, forcing the Fed to react;
Do Over: GDP, Durable Goods and Unemployment levels all have dropped to sustainable levels. The economy has entered, a not-too-hot, not-too-cold non-inflationary growth stage;
3) The Federal Reserve: Fed critics blame Greenspan & Co. for allowing the bubble to over-inflate, only to ultimately be forced to pop it in 2000 as the economy overheated. When the Fed started a rate hiking cycle four years ago, in our opinion, they raised rates too far too soon.
Do Over: The Fed will get it right this time, going only a ¼ point per meeting, allowing the markets to adjust;
4) Post War Iraq: The Neo-Conservatives hawks who pressed for the invasion of Iraq failed to create an adequate strategy for a post-war period. This created an opportunity for insurgents to cause havoc and mayhem;
Do Over: With the handover to the Iraqi Ruling Council a few days early, the planners have gotten one right for a change. The insurgents will be denied an opening to thwart sovereignty for Iraq;
5) Presidential Polls: President Bush has taken a battering in the polls over the past 6 months: Abu Ghraib torture scandal, Fallujah Insurgents, and other problems drove his approval rating to the lowest levels of his term;
Do Over: Bush has regained a slim lead in recent surveys, improving the odds against his being a “one-termer.”