The market enters the second half of September near its recent highs after a strong rally off the early August lows. Northlake’s recommended stocks and models have performed well in the rally but we are beginning to take a more cautious view. Quarterly earnings season is about to start and…

…we believe the possibility of a repeat of July’s market weakness is possible. It is now clear that the economy has slowed from the rapid growth of late 2003 and early 2004. Slower growth first impacted corporate earnings at mid-year as 2Q earnings results and guidance were below expectations. We expect another bout of weak reports and poor outlooks in 3Q reports. The big question is whether this news is already baked into stock prices. In July, the bad corporate earnings news was largely unexpected and the slowdown in economic activity caught corporate managers and Wall Street by surprise. Stock prices responded by moving sharply lower. Most commentators are expecting a weak earnings season now so stock prices likely reflect some of the upcoming negative news.
Northlake believes that the rally in stocks leaves the market vulnerable to upcoming news flow and the possiblity of a 3-5% pullback is high. We expect stock prices to be above current levels by year end, however. Consequently, we will use any pullback to position portfolios in our favorite stocks and invest cash reserves.
Later in the week, we will provide updates on recent performance and news from our special situation portfolio. In the meantime, you can find a summary of our thoughts on our portfolio on the Research Samples link.