Market Commentary...
gruntal.com
Tuesday, July 6, 1999
"A 15% Rise in Corporate Profits for the Second Quarter
Should Help Fuel the Summer Rally"
Now that the Federal Reserve has told us exactly what it intends to do in
terms of interest rates, it seems that the market will now pay attention in
the right area earnings. We look for above-average performance in
sectors such as technology, consumer durables and nondurables, and
telecommunication equipment and services. In addition, we believe that
transportation will have some interesting positive results to report, with
a strong performance in the financial services industry. Overall, we look
for a 15% increase in corporate profits for the second quarter. Although
we are at the high end of expectations, we are optimistic given the
underlying strength of the consumer and the economy.
The Federal Reserve does not meet again until August 24; therefore, we
will have two months worth of consumer price index (CPI) data,
employment statistics, and economic numbers to evaluate. As far as the
June CPI is concerned, we forecast 0.2%. We do not see any apparent
signs of inflation. Specifically, leading industrial commodity prices are
down below the recent rallying points and are lower than a year ago,
which serve to confirm our belief of no evident inflation. In fact, the CRB
Index is scraping near a 36- or 37-year low. Moreover, wages relative to
productivity is a net wash out. Financial assets and real estate should go
their own way based on the laws of supply and demand. Gross domestic
product (GDP) should level off at 3.0% this year as well as next in our
view. Therefore, we do not believe that the Federal Reserve will raise
rates again at the FOMC meeting on August 24, and we believe that the
Fed will maintain its neutral bias.
We believe that we are in the midst of a summer rally, especially since we
are already at new highs across the board and expect new highs to follow.
The international landscape looks benign with recovery continuing to
evolve out of Asia and Latin America. However, this recovery is not too
fast in terms of creating inflationary problems and not too slow to result
in a vacuum. Europe has slowed with interest-rate cuts, and we believe
that, after a mild downturn, recovery in Europe is a reasonable
expectation.
Thus, the coast is clear for the Dow Jones Industrial Average, S&P 500,
and Nasdaq to reach our year-end targets of 12,000, 1,600, and 2,900,
respectively. We believe that long-term interest rates will move back to
5.75% and remain at that level. There is less volatility now than in the
past two years, a favorable condition, and we expect more of the same
going forward.
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