By Joseph A. Harrison, CFA, Partner

A most unusual quarter has just past. The elements brought firestorms to the Northern Rockies and flood conditions to the Northeast, while Texas sweltered in a drought. Oil and natural gas prices moderated in July, then soared to new highs in September While interest rates, as measured by 10-year U.S. Treasury Notes, moderated through-out the quarter, equity prices remained in at rading range pattern with considerable rotation among groups. The Olympic games have ended. The political games have begun.

Most indicators move lower

Although economic growth continued, the signs of a slowdown became more apparent as the quarter wore on. Hours worked, industrial production, and consumer spending all declined over the summer. Construction spending declined sharply and the Purchasing Managers’ index fell below 50, indicating declining activity, not just slower growth.

During late August and September many companies pre-announced weaker than forecast earnings expectations for the third quarter. The affected companies cover many economic sectors and reflect a number of broad economic trends superseding company-specific factors.
For some companies with significant European sales, the very weak Euro and slower European growth were responsible for the shortfall. For others, higher raw material costs coupled with an inability to raise prices pressured margins. Yet others faced less-than-expected revenues in the face of slowing demand.

Problems in Europe

In Europe, weaker currency values and higher oil prices had a double-barreled effect on consumer spending and European-based manufacturing and distribution costs. In the past 20 months the price of oil in the U.S. is up 215%. In the U. K., oil was up 276% in £ Sterling and on the continent the increase has been an astounding 331%. Such increases constitute a pervasive world-wide depressant. If oil prices continue to escalate, they could have a serious impact on the global economic outlook.

Back in the U.S., the equity markets enjoyed a good summer rally with a long-awaited improvement in the number of companies participating in the gain. Then in September, a number of pre-announced earnings disappointments put the market into reverse. We await the release of actual earnings in mid to late October, a period that has been traditionally poor for equity performance.

Not all gloom and doom

With a number of domestic and international indicators showing a clear world-wide slowdown and several destabilizing influences in currency and energy markets, a flexible investment policy should enable us to take advantage of valuation opportunities. Many indicators remain very positive over the long term. U.S. manufacturing capability is strong, our technology infrastructure is improving exponentially, and healthcare breakthroughs promise an improved quality of life. Any near-term weakness resulting from the destabilizing currency and energy forces should be viewed as an opportunity for long-term investment results.

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Perspective is published quarterly by Midwest Investment Management LLC, Cleveland, Ohio for its clients, friends and members of the business community. All information contained herein reflects the opinions of the authors and does not necessarily constitute investment advice. Past results are no guarantee of future performance. ©2000, Midwest Investment Management LLC. All rights reserved.