The bond market also remained range-bound throughout November, taking its cues from the stock market. With every rally in the stock market the bond market sold-off, lowering bond prices and increasing yields. With every sell-off in the stock market the bond market rallied, raising prices and lowering most bond yields.

Normally the stock and bond markets are positively correlated, that is, they go up and down together. However, throughout November they remained negatively correlated. What this anomaly was saying was that no one was sure what was ahead.

When stocks rallied on good economic news, bonds declined. Bond investors feared that if the U.S. economy did in fact grow robustly ahead, then inflation was sure to follow.

The irony of this dichotomy, was that if in fact the U.S. economy would take flight ahead, the Federal Reserve (Fed) would surely raise short-term interest rates to mitigate any inflationary pressures that might be building. That scenario would be bad for stocks as well as for bonds.

Furthermore, if the U.S. economy began to decline ahead, then the stock market would surely to fall, and the bond market would be the big winner.

However, with short-term interest rates near fifty year lows throughout November, there was little ammunition left for the Fed to bolster bond prices.

December started and ended the same way for most stock market indexes, that is, up, up, and away. Investors seemed to have caught “scandal fatigue” and chose to ignore the investigations that were underway in reference to trading improprieties at the New York Stock Exchange and the mutual fund industry.

I guess when stocks go up no one seems to care about quality of earnings or other financial chicanery as long as the stock market keeps rising.

The Iraq war continued to escalate in December with some of the bloodiest days of the war in that month. Even the capture of Saddam Hussein in December did little to assuage the appetite of the Iraqi insurgents to kill and pummel American soldiers daily.

The stock market was so resilient in December that even the escalation of the terror alert code from yellow (elevated alert status) to orange (high alert status) near the holiday season, had no negative impact on the stock market. Most stocks continued to climb as the holidays progressed.

The bond market was range bound throughout December,

gaining some support as a “flight to quality”, when the alert color was raised to orange.

Gold and crude oil prices continued to rise during December as the dollar continued its free-fall against the Euro and Yen.

Foreigners have been selling U.S. dollars throughout 2003 as they fear the economic impact of another terrorist attack on U.S. soil, and as a result of the record breaking trade deficit the U.S. has accrued with its foreign trading partners.

Most major stock market indexes finished 2003 with their first annual gain since 1999.

However, even though many stocks have risen from the ashes in 2003 due to the 2000 stock market meltdown, many stock prices are still down 50% or more during the growling bear market that began in 2000.

I have recently increased the allocation weightings of gold and energy stocks in the portfolios that I manage for my clients. I have also been buying short-term corporate bonds for the first time in several years. I remain cautious ahead for 2004, even though most economic pundits are predicting a robust economic recovery ahead.