Stock and bond market analyses by Elaine Garzarelli for July 14, 2000...
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It looks like the stock market is no longer worried about further Fed rate hikes, and weaker home and auto sales are increasing evidence of a slowing economy. But a rising market could lead to an August rate increase.
We still like bonds, as the Fed seems to be nearing the end of a series of tightenings. Although they are below their peaks, we recommend BAA corporates.
Stock market analysis
Stock markets have recovered from their lows, with the S&P 500 now down only 2 percent from its high, the Dow off 8 percent and Nasdaq down 17 percent. Market participants are not as worried about more tightenings since there is increased evidence of an economic slowdown. Weaker housing and motor vehicle sales suggest higher interest rates are having an impact. When Greenspan spoke earlier this week, he highlighted the new economy in his discussion, not inflation. The indicators we watch for inflation have been favorable, including commodity prices trending lower. Also, upscale hotels are reducing their weekend rates in order to fill rooms.
We believe, however, a rising stock market concerns the Fed and may be a reason rates could be raised in August. Greenspan does not want a resurgence of growth before the economy has a chance to slow to the 3.5 percent or 4 percent rate he would like. One more tightening this year is not completely out of the question yet.
We are careful in what we invest in. Normally, a rising tide lifts all boats -- thus, all groups do well during a rising stock market. However, we do not believe that is the case in this cycle since our indicators are below 30 percent, and the S&P 500 is still about 20 percent overvalued. Because we see a divergence in group valuations, our strategy remains being fully invested in undervalued sectors such as building materials, drugs, energy, financials, foods, homebuilding, household products, some technology, tobacco and utilities
Interest rate/bond market analysis
Our work on the bond market continues to show that bonds should be part of one's portfolio. Normally bond yields peak when we near the end of the Fed tightenings. We predict 10-year yields should decline to 5.7 percent over the next six to 12 months. As we mentioned before, we also recommend BAA corporates -- now yielding 8.38 percent compared to their May 18 peak of 9.08 percent<<< |
