by Joe Battipaglia
Chairman of Investment Policy
Monday, July 26, 1999
No Change in Our DJIA 12,000 Year-End Target
For those of you with a short memory, it was only July 16 th when we had new highs on the NASDAQ Composite and S&P 500 of 2,864 and 11,209 respectively. The sell-off that has ensued since then is probably for several reasons that are perfectly understandable. First, we have had outsized gains in the first half of the year and a market which correctly anticipated a huge rise in earnings. The second reason is a "what have you done for me lately?" scenario, whereby earnings have commanded the upper end of expectations and S&P tech stocks have averaged over 40% gains in quarterly results. Moreover, last Friday, it was announced that PC sales were up 27% in the second quarter alone, but investors are a fickle group, and they are wondering what have you done for me lately as far as the third and fourth quarters' performance are concerned. Thirdly, now that the first half of the year is over, investors now are concerned about Y2K issues. They inquire whether we will make it to the New Year with the lights on? Also, they are questioning will companies still spend money, and more importantly will consumers continue to spend? Lastly, is the looming concern regarding the Federal Reserve in terms of the interest rate outlook. In fact, Fed Chairman Greenspan will get another opportunity to testify in front of Congress this Wednesday. We are therefore no further along in psychology than where we were at the beginning of the second and first quarters.
Our viewpoint once again is that there will be no meaningful change in interest rates going forward for the rest of the year. Mr. Greenspan's testimony this Wednesday and the FOMC meeting to follow on August 24 th will not signify a higher level for interest rates. The Federal Reserve is happy to jawbone the bond and stock markets while doing actually nothing about it. Meanwhile on the earnings front, the second half should be explosive, given that comparisons with last year will be easier and the dollar's relative level is lower. We continue to forecast outsized gains in earnings once again. The market is partially anticipating this, but what the market is not anticipating, is a very strong year 2000. That is the new story we are going to address.
The political agenda is setting up as more for everybody on either sides of the aisle. In addition, we have surpluses and a high Fed funds rate which put the policy makers in a very good position to cut rates and to reduce taxes, thereby extending the expansion in the U.S. for the next several years. Along side of this will come Asian recovery and some contribution from a pick up in Europe in our opinion. By and large the real story becomes a strong 2000 and 2001 with a market that still seems attractively valued when you discount the premier 100 companies with the greatest market capitalizations.
We are not making any changes to our year-end index targets (12,000 for the DJIA, 1,600 for the S&P 500, and 2,900 for the NASDAQ Composite) and we do not expect changes in interest rates. We see the yield on the 30 year T-bond trading down to about 5 ¾% by year-end and the short end set by Fed policy will remain 5%. The July CPI (consumer price index) should come in at 0.2%.
Recommended Asset Allocation (%) Aggressive Growth Investors Growth Investors Total Return Investors Income
Investors
Equities 95% 75% 50% 5%
Yield-Oriented Investments 0% 20% 45% 90%
Cash 5% 5% 5% 5%
S&P 500 DJIA NASDAQ
1999 Year-End Target 1,600 12,000 2,900 |
