Stock & bond market analyses by Elaine Garzarelli for June 30, 2000...
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Investors believe the Fed to be near the end of its tightening cycle, and growth remains strong despite recent statistics showing a slowdown.
Modest inflation and a federal budget in surplus means further declines in bond yields. Despite a decline from their peaks, we still recommend BAA corporates.
Stock market analysis for June 30
Recent weakness in economic data has allowed the Fed to not raise rates this month. We are not certain, however, that the Fed is finished raising rates. A pause at this point allows the Fed to get more data to analyze before the August meeting. Although some risks remain about inflation and a fast economy, the risk of raising rates and possibly having to unwind if the slowdown becomes more pronounced appear to be the reason for the wait-and-see attitude.
We believe tightenings are still possible (60/40) and even taking into account the recent weakness, growth in the first half of this year still remains above what the Fed views as sustainable. Nonetheless, that is history now and we will be watching the inflation and employment reports, along with the FIBER leading inflation index, to give us an idea of the Fed's next move. Investors, at this point, believe the Fed is near the end of its tightening cycle.
Our strategy remains to be fully invested in undervalued sectors. We favor groups whose relative prices are below their historical normal trading ranges and whose earnings prospects for 2001 are strong. We remain invested in groups such as drugs, financials, foods, household products and tobacco. We remain slightly underweighted in technology groups.
Interest rate/bond market analysis
We continue to recommend bonds as part of one's asset allocation -- especially with the string of Fed tightenings coming near an end. With our modest inflation outlook and the federal budget in surplus, our model continues to predict 10-year yields declining to 5.7 percent over the next six to 12 months (the current rate is 6.03 percent) and we continue to recommend BAA corporates (now yielding 8.48 percent compared to their May 18 peak of 9.08 percent).<<< |
