Alger Releases Monthly Market Review.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 28, 2004

Fred Alger Management, Inc. today released its monthly Market Review.

The global economy is firing on all cylinders. Retail sales are strong. Consumers are buying. There's growth in the United States and growth in Asia. Corporations are seeing record profits. Wall Street's reaction? If the Street could have spoken in April, it would have said, "Interest rates are going to rise. Corporate earnings have peaked. The rally is over."

Once again, the week-to-week gyrations of the market are being governed by very, very short-term horizons. Yes, the situation in Iraq is messy, and international tensions show no signs of dissipating, but economies have thrived in times of war and tension in the past. And yes, accelerating global growth will, as Alan Greenspan indicated in his testimony to Congress on April 21, eventually lead to a rise in interest rates. But rising rates do not mean the end of earnings growth or economic growth, nor should they trigger investor flight away from equities. Monetary policy is a mechanism to help modulate the economy and either increase liquidity or contain inflation. Unfortunately, in recent years, what Alan Greenspan says and what the Fed Reserve does have been invested (no pun intended) with far too much weight. The goal for any economy and any investor should be sustainable growth. At some point, raising interest rates will help ensure continued economic expansion, and not be taken, as the herd fears, as a sign that growth is coming to an end.

We think that Wall Street is over-reacting to the prospect of an interest rate hike. There is a disproportionate level of jitteriness relative to the underlying fundamentals of both the market and the economy. Some of that may be a hangover from 2000 through 2002. It's as if the market can't quite digest the wide swath of good news. Corporate earnings weren't just at all time highs for 2003 -- they're continuing to beat expectations. More than three-quarters of the S&P companies that have reported so far have surpassed earnings expectations, and the second quarter is on track to beat as well. Earnings growth is being driven by top-line revenue growth, and not purely by greater productivity or efficiency.

On the economic front, we doubt that there will be enough job creation in the coming months to offset the widespread sense that the rewards of the current recovery are going to companies and shareholders rather than to the "average American." But we do expect the job market to improve and the economy to continue to fire on all cylinders. In short, the market has all of the ingredients for a rally except for the conviction of investors.

The Economy

1) Jobs redux: The March payroll report surprised on the upside, with non-farm payrolls gaining 308,000. Average hourly earnings were up 0.1%. The headline unemployment rate (based on the household survey) went up to 5.7% from 5.6%. Initial jobless claims for the week ended April 10 rose from 330,000 to 362,000, and then fell to 353,000 for the week ended April 17. The four-week moving average rose to 347,000. In early April, continuing claims dipped below the 3 million mark for the first time since mid-2001, and then rose to 3.019 million the week ended April 17. The employment report contributed to a surge in interest rates with the yield on the 10-year note rising from 3.8% before the report to more than 4.4% in the weeks after.

What it means: The overall employment picture did brighten in March. Nonetheless, there is still little evidence of robust job creation relative to the level of economic growth we are currently experiencing. True, employment creation tends to come last in an economic recovery. Remember the "jobless recovery" of the early 1990s, when job growth took several years to catch up with the surge in economic growth. Still, today, the labor force data does not take sufficient account of "labor force participation," which means that millions of people who are out of work but no longer looking for work do not show up in the statistics. The labor force participation rate is at a 15-year low. Our friends at the International Strategy and Investment Group, for instance, estimate that if there were as many people in the active labor pool now as there were in 2000, the unemployment rate would be close to 7.7%. In short, it will take many, many months of very strong job numbers to alter the trend of the past three years and create a tighter labor market. That in turn will give the Fed room to take its time raising interest rates.

2) Inflation (haven't heard that word in a while....): The March core CPI was up 0.4%, one of the sharpest jumps in the past decade, and that increased the annual core CPI (which doesn't include volatile energy and food prices and which is often what people mean when they say "the inflation rate") to 1.6% from 1.2%. Energy prices also were up 1.9% month-over-month.

What it means: Globally, both fuel and commodity prices are rising fast, though concerns about an economic slowdown in China briefly halted that trend during the middle of April. And for the first time in three years, there is evidence that some of those commodity cost increases are being passed on to the end user, a.k.a. the consumer. However, 1.6% inflation, even if that is maintained, is historically low, and anxiety aside, there is little evidence that inflation will be a problem anytime soon. For corporations, the silver lining is a return of pricing power, which if not accompanied by cost pressures, will result in even better earnings than we have seen to date.

3) Retail sales, GDP growth, and consumer sentiment: March retail sales were up 1.8%, well above expectations. February retail sales were revised up to a 1.0% month-over-month increase. Building materials showed particularly strong gains, which makes sense given the surge in home building. Surveys of individual retail businesses confirm the national data. That suggests that GDP growth for the first quarter could be nearly 5%. The University of Michigan Consumer Sentiment Survey slipped slightly, to 93.2 from 95.8, and the expectations component (which gauges people's feelings about the future) slipped to its lowest level since last fall.

What it means: More evidence that the economy is expanding at a rapid clip fueled by consumer spending. Of course, it's also true that credit card debt has grown as consumers take on more card debt in a low-interest rate environment. The dip in consumer confidence clearly parallels increased concern about terrorism worldwide and about domestic security in light of the deteriorating situation in Iraq and the acrimonious 9/11 commission hearings on Capitol Hill. There is no sign, however, that public unease over security has led to any diminution of spending.

4) Housing and industrial production: Housing starts exceeded 2 million units, and were up 6.4% month-over-month and more than 15% year-over-year, but relative to the end of last year, activity has slowed. New home sales have also remained elevated, as have existing home sales. The ISM Manufacturing Index ticked up when analysts had expected it to tick down, and was at 62.5 for March after 61.4 the month before. Regional surveys of manufacturing activity also were strong, with the NY Empire State Manufacturing Survey at 36.1 in April, up from 25.3 in March, and the Philadelphia Fed Survey at 32.5 in April up from 24.2 in March. Durable goods orders jumped 3.4% in March after a 3.8% increase in February. Autos, metals, and business equipment were particularly strong. Overall, industrial production was up 6.6% between the fourth quarter of last year and the first quarter of 2004.

What it means: Manufacturing activity is surging, even though manufacturing employment has cratered. Consumer spending, a surge in corporate capital spending, and some modest restocking of inventories are all contributing to the surge. While housing may cease to show dramatic month-to-month gains, new home demand and housing prices look poised to rise even in a rising interest rate environment.

The Markets

1) Though day-to-day the markets felt choppy -- one day drifting, one day flat, one day up, another day a sell-off, the Dow was up on a four-week basis at the close on April 22, though barely in positive territory for the year. The Nasdaq and the S&P 500 were also flat for that four-week period and are up slightly for the year. But all major indices are below their highs for the year. Year-to-date, through April 22, the Dow was up 0.70%; the S&P 500 had gained 3.06%; and the Nasdaq index was up 1.47%.

2) We are now in the midst of earnings season, and more than three-quarters of the S&P 500 companies that have reported are beating expectations. Two sectors whose earnings reports are in-line with expectations are energy and utilities. The consumer discretionary, information technology, financials, and health care sectors are all coming in substantially above initial estimates. The second quarter looks very promising as well. Current estimates for the second quarter are for between 15% and 20% growth. For all of 2004, according to Standard and Poor's, operating earnings estimates for the S&P 500 stand at $63.87, which means that the market at April 22 levels is trading at a multiple of just under 18x. As a result, even though S&P earnings for 2004 are poised to grow nearly 17% year-over-year, the forward PE is roughly the same or even slightly lower than it was this time last year. Given the superior earnings growth we are witnessing (current estimates for the second quarter are for between 15% and 20% growth), we think the market has significant room to advance. Near term, the market may continue to gyrate, as it did in February through April, based on uncertainty about the timing and magnitude of future interest rate increases as well as uncertainty generated by election year politicking. We will watch these debates with interest and not a little amusement, because we think they distract from the proper focus: how the individual companies we follow and invest in are performing fundamentally.

As we have noted in the past, vast amounts of cash continue to sit on the sidelines, held by corporations and by individuals. Today, we're looking at a record $5 trillion in individual money market accounts, savings accounts and certificates of deposit. Corporations are similarly cash-rich, with Microsoft's hoard of $50 billion in cash simply the most often cited example. Cash (and credit) are the fuel of economic expansion, and we are seeing a massive build-up of fuel. Unless it gets released all at once (which is unlikely), the current level of economic growth and earnings growth appears not only sustainable but may get stronger before interest rates act as a break. If only the international political situation were as bright as the global economy....

Fred Alger, Chairman of the Board and
Chief Market Strategist
Dan Chung, President and Chief Investment Officer
Zachary Karabell, Senior Economic Analyst

There is no guarantee that the views and opinions expressed in this newsletter will come to pass, and they are not meant to provide investment advice. These views are as of April 27, 2004 and are subject to change based on subsequent developments. Investing in the stock market involves gains and losses and may not be suitable for all investors. Past performance is not indicative of future results. For more complete information about The Alger Funds, The Alger Institutional Funds, Alger American Fund, The China-U.S. Growth Fund or Spectra Fund, including investment objectives, risks and charges and expenses, send for a prospectus from the Funds' distributor, Fred Alger & Company, Incorporated, 30 Montgomery Street, Jersey City, New Jersey 07302, or call 1-800-254-3797. Please read the prospectus carefully before you invest or send money.

Shares of the funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency and involve investment risks, including the possible loss of the principal amount invested.

The following are definitions of some of the terms used in this newsletter: GDP (Gross Domestic Product) is the market value of goods or services produced by labor and properties in the U.S. The Conference Board's Consumer Confidence Survey is based on representative samples of 5,000 U.S. households. The University of Michigan Consumer Sentiment Index is used in conjunction with other consumer confidence indices to measure consumer behavior or services produced by labor and properties in the U.S. ISM (the Institute for Supply Management) exists to educate, develop, and advance the purchasing and supply management professionals. The Empire State Manufacturing Survey indicated manufacturing conditions in New York State. The Philadelphia Fed Survey provides early indication of price changes, employment trends, and general business conditions in manufacturing, which reflects expectations of a macro level economy. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including other service-oriented firms. The S&P 500 is an unmanaged index generally representative of the U.S. stock market in general without regard to company size. The NASDAQ is a market value-weighted index that measures all domestic and non-U.S. based securities listed on the NASDAQ stock market. Unemployment numbers from the Bureau of Labor Statistics, 4/2/04. Energy prices from the Bureau of Labor Statistics, 4/14/04. Retail sales from the U.S. Department of Commerce, 4/13/04. Housing starts from U.S. Census Bureau, 4/16/04. Durable goods from U.S. Census Bureau, 4/23/04. Industrial production from the Federal Reserve, 4/16/04. Money market account, savings account, and certificate of deposit data from International Strategy and Investment: Economic Outlook, 4/19/04.