Commentary--Elaine Garzarelli for September 15, 2000...
garzarelli.com
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Edited for ease of reading.
>>> Stock market analysis for September 15
FLASH -- NEW INFO ON OUR INDICATORS
Now we hear talk by equity managers that perhaps because of the slugglish stock market, the next move in the Fed funds rate will be down.
At this point, we believe the Fed will remain on hold in October and through year-end (no tightening or easing) even though favorable statistics on inflation support the equity managers' views.
Cheaper gas prices allowed the CPI to fall 0.1% in August for the first time in more than 14 years. The core CPI rose 0.2% and analysts had expected both to rise 0.2%. The producer price index (reported Thursday) also fell 0.2%. Taken together, both reports confirm the decline in the FIBER leading inflation index over the last five months.
We monitor and report on the FIBER index each month for our subscribers since we believe it is one of Greenspan's favorite leading inflation indicators. We do not see much inflationary pressure and believe the Fed's string of interest-rate increases had done it's job.
As far as investments are concerned, although investing in the overall S&P 500 (SPY) is okay, we believe certain sectors will greatly outperform the average.
This cycle in the economy gives us a great opportunity to invest in groups that have historically done well as the economy has slowed. We overweight groups such as building materials, drugs, energy, financials, foods, homebuilding, some technology, tobacco, and utilities.
We recommend staying out of cyclicals such as aluminum, appliances, automobiles, chemicals, machinery, metals, and papers. Our fund -- Forward Garzarelli U.S. Equity Fund (FDDEX) -- invests in such groups and has had superior performance all year (beating the S&P 500 by 8X).
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Interest rate/bond market analysis for September 15
Although bond yields have declined over 100 basis points since the beginning of this year, we continue to be buyers of bonds because we believe the long bond has already peaked and we do not see inflation rising to dangerous levels.
The economy should slow more in line with what the Fed views as the potential growth rate, thereby ensuring that the favorable inflation environment of the past few years remains in place. Since bonds are highly correlated with inflation, we believe these assets should be included in one's allocation.
We forecast a downturn in long rates (10-year bond) 5.2% to 5.4% by the end of next year. Currently the rate is 5.79%.<<< |
