HomeMy WebLinkAbout2002 05 28 Regular Item B
TRUSCO
CAPITAL
MANAGEMENT
Tim Nash
Vice President
Executive Summary
Performance
Period End:ing 3-31-02 3 M:onths 6 Months 12 Months 36 Months 60 Months
Total Return 0.23% 9.13% 6.47% 8.25% 10.28%
Equity Return 0.55% 14.38% 6.63% 8.81% 11 .16%
Fixed Income Return -0.47% -0.68% 4.93% 5.95% 7.61%
Economic Overview
The first quarter of the New Year is now "in the books". The S&P 500 was essentially
flat during the first quarter, providing a total return of just 0.3% including dividends. This
followed a 10.7% rebound in the fourth quarter of 2001. The fixed-income markets were also
relatively "sleepy" during the quarter, with the Lehman Aggregate Bond Index returning a modest
0.1%.
The economy showed significant improvement during the first quarter, causing investors
and policy-makers to adopt a more positive outlook for growth in 2002. The consumer benefited
from an)ncrease in jobs, mild weather, and low mortgage rates from the fourth quarter.
Businesses appeared to stop liquidating excess inventories, and began ordering once again. The
shift in favor of growth was sufficient to prompt Fed Chairman Alan Greenspan to suggest in
congressional testimony that a recovery was now underway.
Our outlook for the economy remains positive, but a traditional cyclical "bounce" is
unlikely given the relatively mild nature of the just-concluded recession. Consumer spending for
durable goods may hover near present levels, rather than accelerate sharply, and the housing
market could be vulnerable to any increase in mortgage rates. Moreover, the "tailwinds" that
helped to spur the economy in recent quarters have diminished, and new "headwinds" are
developing. These include a shift in Fed policy, rising oil prices, and a fall-off in the pace of
government stimulus. Currently inflation remains relatively subdued, but a rise in Middle East
tensions and a slip in the value of the US dollar put upward pressure on oil, gold, and some
commodity prices.
In fixed-income portfolios, the stronger economic reports that prompted a shift in Fed
policy will be the dominant theme affecting bonds in 2002, and we have moved from a slightly
long duration relative to the appropriate benchmark, to neutral. However, we believe that
investors have been too quick to assume rapid economic growth, a significant rise in inflation,
and an aggressive interest rate response from the Federal Reserve. As a result, we are maintaining
a neutral duration during the early phase of the economic upswing, and we continue to emphasize
corporate and mortgage-backed securities that will benefit from improving fundamentals.
Looking ahead, we remain positive on the outlook for both the economy and the equity
markets this year, and we continue to recommend an overweight position in stocks. The recovery
has taken hold, and corporate earnings comparisons are turning favorable. We believe the
Federal Reserve will not be in as great a hurry to raise short-term interest rates as is currently
reflected in the futures markets, so the financing environment should remain relatively friendly.
200 South Orange Avenue, 81n Floor, Orlando, FL 32801
Phone: 407-237-4173; Fax: 407-237-4285; E-mail: tim.nash@truscocapital.com