ANALYSTS: FED POLICY OUTLOOK CONTAINING UPSIDE FOR US SHARES
08:10 EDT 05/12
By Mark Pender
NEW YORK (MktNews) - The economy's new technology-enhanced growth rate has thrown expectations for Federal Reserve policy into a rare flux, raising uncertainty and risk aversion in the U.S. stock market and promising to contain any significant upside.
Most dealers and analysts, though not all, believe that 50 basis points is a certain outcome at Tuesday's Federal Open Market Committee, and some believe that a matching 50 basis points at the June or August meeting is also a certainty.
They say the stock market will rally only if the Fed indicates that a 50 basis point move in May will be the last for a while, but few believe this to be a possibility. Further, if this or a simple 25 basis point hike are indeed the outcome, more damaging worries that the Fed was ignoring inflation risks would undoubtedly surface.
Yet the most likely result of the May 16 meeting -- a 50 basis point increase with promises for more hikes ahead -- is considered by many to also be bearish for the stock market.
"The real worry is what the Fed is going to do after next week. Until we know, the best we'll see are rallies in a down market," said Bill Allyn, chief dealer at Jeffries & Co. Allyn said talk in the market is growing that an additional 150 to 200 basis points of rate increases may be in store, a factor he says is contributing to unusually low volumes and odd volatility among the market's best shares.
Allyn says the heart of the question is how much higher rates have to go before corporate earnings slow. "The Fed has the tendency to tighten too much, to overshoot. Things are touch and go," he said.
But given the economy's strong growth, Stephen Slifer, chief economist at Lehman Government Securities, argues that the Fed has an unusually wide margin for error. "When you have domestic final sales growth of 8%, you have a bit of a cushion. The economy's on a tear. You really have to do something to whack confidence and whack it by a lot."
Slifer, who sees 125 basis points of tightenings over the next three FOMC meetings, says that based on the higher potential growth rate, the current 6.0% federal funds target may actually be accommodative and help explain the economy's persistent strength.
"It's time for the Fed to get more serious, get more aggressive," Slifer said, to bring growth back down from what he gauges to be a second-quarter pace of 6.3%.
Michael Farr, portfolio manager at Farr Miller Washington, is upbeat despite the rate uncertainty, saying that even if the Fed does overshoot, Fed officials will quickly correct their error. "I think that what we saw in the fall of 1998 was a Fed that was very quick to hit the ease button three times rapidly when they thought things might be threatened by Asia. When you have a Fed that's that nimble and attentive, I think they will reverse it if they have to."
Though the market as a whole may suffer from uncertainty over rates, Farr argues that standout companies will continue to post solid earnings, continue to attract investors, and prove to be good safe-haven hideouts.
No matter the rate outlook, Farr believes technology companies, given their advantages over "commodity dependent, cash dependent" old economy stocks, will continue to outperform. And the ones he believes will be safest in that group, are the traditional blue chips with a long history of strong revenues and profits. |
