U.S. Stocks May Gain Even if Rates Rise as Earnings
Surpass Expectations
By Philip Boroff
Shares May Rise Even if Rates Do: U.S. Stocks Outlook (Repeat)
(Repeats story from June 5.)
New York, June 6 (Bloomberg) -- Enough with the inflation
hysteria. Rate increase or not, the stock market is poised for
further gains this year.
At least that's the view of some money managers, who argue
a
boost in short-term rates from the Federal Reserve, whether at
its June 30 meeting or later, is already priced into stocks and
bonds.
''Business is great,'' said Uri Landesman, who helps
oversee $350 million at Aaron Fleck & Associates, a Greenwich,
Connecticut, money manager. ''I'm feeling better about the
market than I've felt in a while. I'm finding things to buy. I
wish I had more cash.''
Landesman's been buying America Online Inc., the No. 1
online service. Its stock has lost about 30 percent of its value
in two months, even after its rise on Friday. He's also bought
shares of CMGI Inc., an Internet investment company whose shares
are down 40 percent from their high in April.
Internet shares aren't the only stocks under pressure.
Since the end of January, when all the major indexes rallied,
the Standard & Poor's 500 Index eked out a 4 percent gain while
the Nasdaq Composite Index fell 1 percent.
Weighed on Market
Meanwhile, corporate profit growth has surpassed just about
everyone's expectations.
This ''trading range'' continued last week, as the S&P 500
gained 2 percent and the Nasdaq gained 0.3 percent. The Dow
Jones Industrial Average, which is up almost 18 percent this
year led by economically sensitive shares, gained 2.2 percent.
It closed the week at 10799.8.
To be sure, higher rates prompt professional investors to
place a lower value on future earnings. Higher rates also make
it more expensive for consumers to buy on credit and slow
economic as well as profit growth.
Those concerns have weighed on the market most of year,
particularly since early April, when the yield on the 30-year
treasury bond stood at 5.4 percent. It was up to about 6 percent
Friday, close to a one-year high.
Rate concerns have picked up in recent weeks. The Fed
hinted on May 18 that it might raise rates for the first time in
more than two years.
Pointing to Higher Rates
Fed funds futures, the futures market's closest match to
the central bank's benchmark, point to higher rates. The implied
yield on the contract for July delivery, at 4.97 percent, is 22
basis points higher than the current fed funds target of 4.75
percent. It suggests that traders regard a rate increase as a
virtual certainty.
If the Fed doesn't move at its next meeting, investors will
be pleasantly surprised, said Bob Streed, a money manager with
the Northern Trust Co., which oversees about $250 billion. If
the Fed does raise rates, he said, ''That's what people were
expecting, so you'll get a sigh-of-relief rally.''
''You still have good economic growth and a long-term
decline in interest rates and inflation,'' he continued. Since
1981, the yield on the 30-year bond has gradually declined from
15 percent as the Fed fought inflation left over from the 1970s.
Historically, stocks have gained even after fed funds
increases, according to Ned Davis Research. After two fed funds
increases, the S&P 500 has on average rallied 4.5 percent over
the next 252 days.
More Clues This week
Said Alan Skrainka, chief market strategist at Edward
Jones, the St. Louis-based brokerage, ''A Fed rate increase is
not the end of the world.''
This week promises clues about earnings and inflation.
Executives from major computer-related companies will be
speaking at a technology conference organized by PaineWebber
Inc. And Toys ''R'' Us Inc., the toy retailer, has scheduled an
analysts' conference, according to First Call Corp.
Second-quarter earnings reports, expected in mid-July,
already look promising.
This is the time of year when companies typically warn that
their numbers won't match analysts' forecasts. So far about 34
percent of companies with profit announcements have said their
numbers will be on target -- above the historical average of 23
percent, according to First Call.
On Friday, the government releases wholesale price
statistics and the following week is the consumer price report.
Both reports may help resolve the question of whether the
current concern about U.S. inflation makes sense.
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