Stock & bond market analyses by Elaine Garzarelli for July 7, 2000...
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Though economic growth is slowing, as shown by a moderate gain in employment and restrained wage growth, we're still looking for evidence of a real slowdown before we declare the Fed's work done.
The Fed is close to the end of its work, so bond yields should continue to do well. Although they are below their peaks, we still recommend BAA corporates.
Stock market analysis for July 7
The unemployment report came in close to expectations. The unemployment rate fell to 4.0 percent from 4.1 percent in June, with 206,000 jobs being added. Even with the labor pool falling to a new low, wages are still restrained because those working feel less secure. The odds of further tightenings are lower now that employment gains have clearly moderated and wage inflation is restrained. Many analysts now believe the Fed will not raise rates again (the next meeting is in August). However, we remain cautious because of the stock market upswing and the wealth effect. We would like to see continued signs of a slowdown in the economy before we predict the Fed is 100 percent finished. We must keep in mind that growth in the first half of this year still remains above what the Fed views as sustainable. It has now been a year since the Fed started raising rates and we will be on the lookout for further evidence that the economy is responding to the Fed's attempts to dampen growth. If successful, the Fed will have achieved an unprecedented second soft landing of an expansion -- an outstanding achievement.
Our strategy remains to be fully invested in undervalued sectors such as drugs, energy, financials, foods, household products, tobacco and utilities. We remain slightly underweight in technology groups.
Interest rate/bond market analysis
Based on our bond model's lower bond yield forecast, we continue to recommend bonds. As the Fed's work is near an end, bond yields should continue to do well. We predict 10-year yields declining to 5.7 percent over the next six to 12 months (the current rate is 6.04 percent). BAA corporates -- now yielding 8.39 percent compared to their May 18 peak of 9.08 percent -- are still recommended to be part of one's bond portfolio.<<< |
