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Buy on any correction
Bonds are close to peak
By Elaine Garzarelli, CBS MarketWatch
Last Update: 5:37 PM ET Jan 21, 2000 Commentary
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NEW YORK (CBS.MW) -- New highs were reached this week on several market indexes -- Nasdaq, Nasdaq Industrials, Amex, and Russell 2000.
The stock market should continue to prosper and corrections due to tightenings should be used as buying opportunities.
At this writing, the S&P 500 is off 1.6 percent from its high and the Dow is down 3.2 percent. Earnings are coming in strong and analysts are revising their estimates upward. We believe S&P 500 earnings will grow 9 percent this year as consumer confidence remains high and growth is strong according to the latest Beige Book. Strength is also seen globally in virtually every foreign report we look at (i.e., Germany and Russia). As we have said before, the continued strength is cause for the Fed to continue raising rates. In fact, talk of tax cuts by campaigners like Bush, McCain, and Giuliani creates a lift to the confidence of consumers and business and creates more spending and investing (even though the tax cut proposals may never be implemented).
With many signs of strength in the economy causing concern for the Fed, we must remember that it takes between six months and a year for the effects of the Fed's previous rate hikes to start to slow the economy. In fact, the recent rise in mortgage rates to its highest level since 1996 (the 30-year rate is at 8.26 percent) should help to slow things down a bit. We continue to believe the Fed will have to raise rates further to makes sure the strength in the economy does not ignite any dangerous inflation. The stock market should continue to prosper and corrections due to tightenings should be used as buying opportunities. We continue to recommend investing in equities for the long term -- specifically, the financials, technology and health care sectors.
Interest rate analysis
Bond yields remain high as there is ongoing strength in the economy and stock market. Despite the low inflationary figures reported recently, bond participants worry of the risk that some point down the road inflation will accelerate and the Fed will have to keep raising rates. They are discounting several Fed rate hikes and there is a lot of fear already priced into the market. Sentiment by institutional investors for bonds is bearish which is a positive sign (a contrarian indicator). Historically, when bearishness rises to these levels, bonds generally are close to a peak. Therefore, we recommend keeping bonds as part of one's asset allocation.
Elaine Garzarelli is a columnist for CBS MarketWatch. You can get more information at her Web site.
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