Fed won't hike rates in August
By Frank Cappiello, CBS Marketwatch
Last Update: 3:05 PM ET Aug 4, 2000 NewsWatch
Latest headlines
NEW YORK (CBS.MW) -- Volatility has been the scourge of investors since last December. The wild swing on Aug. 3 was a perfect example of this trend, particularly in the Nasdaq market.
The reason for the markets' rising volatility is uncertainty based on fear of further interest rate increases and worry about how a slowdown in the economy will affect future corporate earnings.
We are now slightly more than halfway through this year and 60 percent of the trading days have seen Nasdaq move up or down more than 2 percent in one day. Contrast this with 1999 when only 25 percent of the trading days saw a move of 2 percent or more in one day.
The reason for the markets' rising volatility is uncertainty based on fear of further interest rate increases and worry about how a slowdown in the economy will affect future corporate earnings.
In my view, the Federal Reserve will "pass" on raising rates this month which will solve the first problem. Admittedly, this is not the unanimous opinion on Wall Street. Some market strategists believe that Alan Greenspan will increase rates one more time before the election campaign heats up; sort of an "insurance" increase.
Today on CBS MarketWatch
Nasdaw eyes tech threesome
Alaska Air returns jets to service
Verizon strike looms
Clinton veteos marriage tax bill
Sidelines: Sports University delivers pep talk
More top stories...
CBS MarketWatch Columns
Updated:
8/5/2000 2:29:44 PM ET
In Alan Greenspan's testimony before Congress on July 20, he noted that there were "credible" reasons to believe that the recent slowing in consumer spending was not an aberration. Recent evidence reinforces that view. For example, sales of new homes fell 3.7 percent in June to the slowest sales pace in more than two years, adding to the recent indications of softer demand for housing that signals the U.S. economy may be cooling.
Further, the Commerce Department's report marked the third-consecutive drop in new-home sales, pushing the seasonally adjusted annual sales rate down to 829,000 units, the lowest since Dec. 1997. Also the index of leading economic indicators held steady at 106, forecasting a change from rapid economic growth for the rest of 2000, the Conference Board said. This index, which attempts to predict where the economy will be in three to six months, fell 0.1 percent in May and held steady in April.
Our conclusion is that the economy may have slowed down enough for the Fed's purposes. Therefore it is highly probable that the Fed will not vote for a rate increase this month and be on "hold" through the election campaign.
Slowing earnings?
The second uncertainty is the equation that a slowing economy means slowing earnings -- more in some sectors and less in others. This will be a continuing worry over the next several months. However, the Fed may find itself in a "Catch 22" situation. If the market senses that the Fed is finished raising rates, this could send stocks moving up again unless third quarter corporate profits disappoint more than expected. Then the Fed is back to square one with the need to start tightening again.
So it's hard to see that Alan Greenspan will give investors a "green light" over the short term and stay completely out of the way, allowing the stock market to reclaim its prior highs in the S&P, Dow, and Nasdaq. That event will take several quarters of deceleration activity and during this period, the Fed will remain a factor.
Nevertheless, it is difficult to be bearish on individual stocks given the sharp market declines of last spring and in the past week. |
