The full focus of the first quarter
of 2003 was on the war in Iraq. All else in the world has faded into the
shadows as people have become transfixed by 24-hour television coverage of the
coalition’s drive to Baghdad. When battles go well, the market goes
up. If there is hint from the “talking
heads” that there is a military pause or that the going is “getting tough” then
there is sell-off.
When news
of the attempt to “decapitate” the Iraqi regime by the bombing raid on the very
first night of action in Baghdad
hit the wires, the markets took off around the world. Investors rushed to embrace the idea that the
conflict would be finished within 48 hours – a bit of weekend
entertainment! In fact, the rally which
was ignited after the decapitation attempt was so powerful that the American
markets went into positive territory for the year after having been down rather
substantially earlier in the month of March.
By the end of the quarter, unfortunately, some of the gains had been
relinquished. In sum, emotions are
running high and responses are visceral.
A lot of analysis has been “chucked out the window”. The direction of the markets is largely
determined by the success of our troops on the ground in Iraq.
Before the
State of the Union speech, President Bush outlined a major new tax initiative
in order to stimulate the US
economy. The centerpiece of this
proposed legislation was the total elimination of the tax on dividends received
by investors. Additional parts of the
bill accelerated reductions in the personal income tax rate, eliminated
marriage tax penalties and extended unemployment benefits to the unemployed for
a few more weeks. This last piece was
almost immediately passed. The total
cost was estimated in excess of $700 billion over 10 years, with the dividend
tax reduction responsible for about half the amount. The markets initially reacted well to the
suggestion that the administration was behind the elimination of double
taxation on dividends. There were plenty
of pundits who went about adding up score sheets to determine the benefits for
investors. Quite expectedly, the
Democrats came out in full force against the centerpiece of Mr. Bush’s
legislative proposal, suggesting it was another scheme for the rich and would
not do much to stimulate the economy.
The bill is being reshaped. The
House has endorsed the original proposal.
The Senate has cut the proposal in half.
Negotiations in conference are proceeding and the White House has
already hinted that it would settle for something less than it had originally
put forward. So some sort of tax
legislation will probably be forthcoming this year, but more than likely it
will be less than what President Bush had proposed.
The equity
markets ended the quarter slightly in the red.
The fixed income markets continued to do well as people remain a bit
nervous and sought safety, especially in Treasuries. Interestingly, the junk bond market had a
good quarter as there was at least some indication that investors were willing
to take a bit of risk. While not jumping
with both feet into the equity markets, at least some investors are putting
some money to work into junk bonds.
Below we review the state of our predictions for 2003. So far, we are still fairly comfortable with
them – but the year is young.
PREDICTIONS FOR 2003 Yes/No COMMENTS
Fed will not allow deflation Yes So far
U.S.
fiscal & tax policies will be expansive Yes Defense spending, Homeland
spending, tax reduction
proposed, highway building
U.S.
economic growth will be at 3%+ Yes
& No This
could be a stretch
Oil prices will drop to low
“twenties” per barrel Yes Oil prices have dropped
as Iraq
& Venezuela
get “sorted out”
Japanese yen devaluation will be
controlled No So far yen has been a little
stronger than expected
Euro will remain strong–at parity
to the dollar or better Yes So far
North
Korea will not “explode” Yes Still
pushing & shoving but no explosion
Osama will be “sold out” Yes The #3 guy has been captured,
looking good
Politics in the Middle
East will lean to the West Yes As Baghdad falls, tilt
will begin
Markets will not be down for a
fourth consecutive year Yes
Still hopeful
(Dare we say this?)
A FINAL THOUGHT
The Economist (March 29th,
2003)
________________________________
The opinions expressed in this Commentary are those of
Baldwin Investment Management, LLC.
These views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
The numbers reported below are derived from sources
believed to be reliable, however, we cannot guarantee their accuracy. Past performance does not guarantee future
results.
A current copy of our ADV Part II is available upon
request or at www.baldwinim.com/disclosure.htm
3/31/03
