Stock & bond market analyses by Elaine Garzarelli for July 21, 2000
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The Fed's efforts to slow the economy down and prevent inflation seem to be working, but the Fed is still on the alert in case stronger economic data and a rising stock market awakens the specter of inflation. There's only a one in four chance of a rate hike on Aug. 25.
We still like bonds, especially BAA corporates, as the Fed seems to be nearing the end of its tightening cycle.
Stock market analysis for July 21
Investors took a breather since Alan Greenspan's speech seemed favorable. He remarked that the economy may be slowing to a more sustainable pace, but the Fed is still on guard about inflation. If a resurgence of stronger economic data or a continuous rapid stock market rise (which would strengthen the economy) occurs, more tightening would be likely. The odds of an Aug. 25 rate hike is 25 percent, in our opinion.
Along with housing starts falling 2.6 percent in June, we find many anecdotal signs of a slowing economy. We see many companies with earnings problems -- Agilent, Lucent, Mattel, Hasbro, Warnaco, Sprint and Federated. S&P 500 operating earnings will grow, we believe, a conservative 7.5 percent next year (below the Zacks consensus of 15 percent). Since the S&P 500 is still overvalued, it is better to invest in sectors rather than the overall index. Because we see a divergence in group valuations, our strategy remains to be fully invested in sectors such as building materials, drugs, energy, financials, foods, homebuilding, household products, some technology, tobacco and utilities.
Interest rate/bond market analysis
Yields declined this week as fears of further tightenings melted. The bond market continues to ride the increase in confidence that the Fed's tightening cycle could be coming to an end. The Fed had raised rates six times over the past 13 months.
As we have mentioned every week in this column, we recommend bonds as 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 6 to 12 months. We also like BAA corporates -- now yielding 8.4 percent compared to their May 18 peak of 9.08 percent. They are 5 percent above the inflation rate, which is an incredible return!<<< |
