Top Financial News
Sat, 26 Jun 1999, 6:06pm EDT
U.S. Stocks May Rally After Fed Votes on Whether to Raise Interest Rates
By Nick Olivari
Stocks May Gain After Fed Vote: U.S. Stocks Outlook (Repeat)
(Repeats story from June 25, adds comment in 5th
paragraph.)
New York, June 26 (Bloomberg) -- Investors pretty much
expect the Federal Reserve to raise interest rates next
Wednesday. The questions now are by how much and what will the
impact be.
''There is a 75 percent chance of a 25-basis-point
increase, which with no other comment will be a non-event,''
said Uri Landesman, who helps oversee $350 million at Aaron
Fleck & Associates, a Greenwich, Connecticut, money manager.
''There is a 10 percent chance that the Federal Reserve
will raise rates by 50 basis points, which will be a little more
negative'' for stocks, he said.
By all accounts, a rate cut has been ''discounted,''
meaning the market's prices already reflect it. If expectations
are correct, stocks should gain in coming weeks, most analysts
say.
''Federal Reserve action will not be harmful to the stock
market,'' although a temporary decline is possible in the
aftermath of the news, Goldman, Sachs & Co. strategist Abby
Joseph Cohen said. ''To the extent that the Federal
Reserve convinces folks that they're focusing on inflation and
taking actions to ensure that the (economic) cycle lasts as long
as possible, it could be helpful.''
Almost as important as the decision on rates are any hints
the Fed gives about future changes.
''We are waiting for any commentary as the Fed could still
say something that will make people uncomfortable,'' Landesman
said. He has been buying America Online Inc., Internet-venture
fund company CMGI Inc. and No. 4 U.S.-long distance company
Qwest Communications International Inc.
Some investors believe even a 50-basis-point increase may
send shares higher in coming weeks as it erases uncertainty
about other increases later in the year.
''In some ways a single big move may be preferable and we
may see a relief rally if the move is decisive,'' said David
Bayer, president of Minneapolis-based Knappenberger Bayer Growth
Advisors, a money management firm.
Losses This Week
Still, stocks were hurt this week as the yield on the 30-
year government bond hovered near 19-month highs, indicating
bond investors expect the Fed may raise rates more than 25 basis
points, or that any rate increase will only be the first of a
series.
Higher yields increase the attractiveness of bonds compared
with other securities.
For the week, the Dow Jones Industrial Average fell 2.4
percent, the S&P 500 dropped 1.4 percent and the Nasdaq
Composite Index rose 0.7 percent.
Apart from interest rates, investors will also be
scrutinizing new economic releases, including the June
employment figure to be released next Friday.
''Investors look at the jobs number as a gauge of economic
activity,'' said New Amsterdam's Clayman. ''If the Fed jacks
rates just a 1/4 point, and then we see an incredibly strong job
number, investors will say there is another 25-basis-point
increase coming.''
When the Fed raised interest rates by 25 basis points in
March 1997, the Dow gained 23 percent for the year.
In 1994, by contrast, when the Fed raised rates six times
starting in February, the Dow barely eked out a 2.1 percent gain
that year.
Those rate increases included two of 50 basis points and
one of 75 basis points. And the Fed raised rates another 50
basis points in February of 1995, bringing rates to 6 percent
from 3 percent in the 12-month period.
Earnings Outlook
Interest rates aren't the only thing on investors' minds.
Some are looking past next week's meeting of the Federal Open
Market Committee and debating the outlook for second-quarter
profits.
''Two converging events are the Fed meeting next week and,
in the next two to three weeks, the battle of interest rates
versus earnings,'' said Marian Pardo, a portfolio manager with
J.P. Morgan Investment Management Inc., which oversees $320
billion. ''Earnings in the short run are going to win, as with
the strength of the economy these earnings should be strong.''
Pardo, who focuses on small-cap companies, has been adding
to holdings of Montreal-based educational entertainment producer
Cinar Corp. and recycled-paper packaging maker Carustar
Industries Inc.
Analysts surveyed by First Call Corp. are forecasting that
profit for companies in the S&P 500 will rise by 11.7 percent in
the quarter. That would be the highest growth rate since the
third quarter of 1997, when profits grew by 11.8 percent.
While the average profit growth forecast for S&P 500
companies has been reduced from 14 percent at the beginning of
this year, ''my sense is that earnings will come in better than
expected, '' said Michelle Clayman, chief investment officer at
New Amsterdam Partners LLC, which oversees $820 million. Clayman
has been buying programmable logic-chip maker Altera Corp. in
recent days.
Warnings on profits so far have failed to dent investor
optimism for profit growth. Some 28 companies have warned
investors that profits won't measure up to their earlier
projections, including Advanced Micro Devices Inc. and Goodyear
Tire & Rubber Co.
Thirteen companies have made positive statements on
earnings including Georgia-Pacific Group, the No. 2 U.S. maker
of lumber and paper, which advised second-quarter profit will
exceed analysts' estimates because of strong home-building and
increased demand for pulp, paper and packaging.
Companies expected to release results next week include
Nike Inc. and FDX Corp.
Cash Waiting
One indicator points to gains in coming weeks even with a
rate increase. The Standard & Poor's Utility Index has returned
11 percent this quarter, climbing as investors selected
defensive issues that pay high-dividend yields. That money
should move back into other equities amid easing interest rate
concern.
''The market tends to enjoy outsized gains in the quarter
following a double-digit utility move, and the upcoming third-
quarter should prove no different,'' Tom Galvin, chief
investment officer at Donaldson, Lufkin & Jenrette Inc., wrote
in a report.
''With more than $50 billion added to the utility index
market capitalization since March 31, the gunpowder is waiting
to be applied to a powerful rally,'' he said. He expects
computer-related, financial stocks and growth stocks with high
price-earnings multiples to be among the big gainers.
AltaVista CEO on "Power Lunch"
Rodney Schrock
AltaVista
CEO
Rodney Schrock will appear on "Power Lunch" at 1:10 pm ET today.
Developed in 1995 by Digital Equipment Company, AltaVista became a division of Compaq Computer in 1998 after Compaq's acquisition of DEC. It is again looking for a new partner as its parent company has put it up for sale recently. Tune into the AltaVista CEO as he discusses his company's outlook in an exclusive interview on CNBC-TV!
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AltaVista is a division of Compaq Computer Corporation.
Detailed Quote Charts Company Info Analyst Ratings
52-Week (CPQ) Chart
About Rodney Schrock...
Mr. Schrock is the CEO of AltaVista, which is a search engine website visited by more than 9 million visitors each month. It also provides features such as language translation services, online shopping, and a Yellow Pages directory.
Mr. Schrock was previously Senior Vice President and Group General Manager for the Consumer Products Group for Compaq Computer Corporation. He also held various management positions including Vice President of the Presario PC Division and Director of Compaq Systems Product Marketing. Prior to joining Compaq in 1987, Mr. Schrock was an industrial engineer with IBM Corporation.
Mr. Schrock received a Masters in Business Administration degree from Harvard University and a Bachelor of Science degree in industrial management from Purdue University.
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