Stock & bond market analyses by Elaine Garzarelli for July 28, 2000...
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Edited for emphasis.
Current stock market report
The recent GDP numbers seem to show strong growth, but upcoming reports should show signs of a slowing economy, and the stock market has dropped because of worries about what the Fed will do on Aug. 25.
We remain invested in bonds, which normally peak near the end a Fed tightening cycle, and like BAA corporates.
Stock market analysis for July 28
The stock market has been volatile over the past few weeks, as the economic data has not shown a consistent pattern of weakness. Last week, investors believed the economy had slowed and, therefore, had little fear of further tightenings. Today, the GDP report showed the economy grew at a strong 5.2 percent in the second quarter compared to 4.8 percent in the first, which rekindled fears the Fed might need to be aggressive at its Aug. 25 meeting. At this writing, the Dow is down 11 percent from its high, the S&P 500 is down 7 percent, and the NASDAQ is off 27 percent.
In our opinion, the GDP number for the second quarter is OLD information and upcoming economic reports should show some softness, especially with the recent nosedive in the NASDAQ (down 13 percent from its recent high). Also, central banks around the world have tightened, which may further slow the US, and the FIBER leading inflation index has not shown a consistent pattern of increases.
In fact, we see cost-cutting among new and old economy companies -- such as IBM cutting more than $1 billion in costs and DaimlerChrysler announcing plans to slash costs by about $5.7 billion in the next three years.
Because we see a divergence in group valuations, our strategy remains to be fully invested in sectors such as beverages, drugs, energy, financials, foods, household products, some technology, tobacco and utilities. We recommend staying out of cyclicals such as aluminum, automobiles, chemicals, machinery, metals and papers.
Interest rate/bond market analysis
As we continue to forecast low inflation and a continuing budget surplus -- the main factors driving bond prices -- we remain invested in bonds and believe yields should decline to 5.7 percent over the next six to 12 months. Another reason we like bonds is they normally peak before the Fed has finished the last of its tightenings.
In addition, we like BAA corporates -- now yielding 8.3 percent (5 percent real) compared to their May 18 peak of 9.08 percent.<<< |
