Weekly Commentary by Elaine Garzarelli for August 4, 2000...
208.16.210.13
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Edited for emphasis & ease of reading.
>>> Current stock market report
Falling gas prices, a stable unemployment rate and an increase in corporate mergers seem to indicate that inflation is under control and a Fed rate hike is not imminent. But a stock market that accelerates too much can trigger Fed action again.
Bond yields are still doing well, as they do near the end of a Fed tightening cycle, and we still like BAA corporates.
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Stock market analysis for Aug. 4
Volatility in the stock markets continues each week as new data come in.
Today, the unemployment rate remained at 4 percent, allaying fears of continued tightenings by the Fed.
Last week, market participants worried about the strong GDP report. Businesses added 138,000 jobs in July after creating 242,000 in June, while average hourly earnings rose 0.4 percent.
We don't see much inflationary pressure. The U.S. PMI services prices paid index and the consumption price deflator remain favorable and, based on the drop in gas prices, the PPI/CPI reading should be low, while the recent rise in the dollar should keep inflation down.
Another interesting noninflationary statistic we saw is the surge in mergers over the past year. Mergers generally coincide with lower inflation since they involve cost- and price-cutting.
Also, as Fed Chairman Alan Greenspan has remarked, productivity is helping offset the rise in compensation costs. Globally there have been more than 110 central bank tightenings over the past year, which is helping to slow our exports.
We don't believe inflation will be a problem for our economy and believe there is less of a chance of a tightening in August. If the stock market reaccelerates too much, however, the economy may strengthen and the odds increase for more tightenings.
We still believe the overall market is overvalued by about 20 percent but believe investing carefully in undervalued groups is key to outperforming in this cycle. 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 continue to recommend staying out of overvalued cyclicals such as aluminum, automobiles, chemicals, machinery, metals, papers and steel.
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Interest rate/bond market analysis
Bond yields continue to do well, with the 10-year bond yielding 5.95 percent. We believe bond yields have already peaked since the Fed is near the end of this cycle of tightenings -- normally, bonds do well at the end of the tightening cycle. We continue to forecast bond yields should decline to 5.7 percent over the next six to 12 months.
In addition, we like BAA corporates -- now yielding 8.28 percent, compared to their May 18 peak of 9.08 percent.<<< |
