Fed policy??
>>NEW YORK -- Investors pretty much expect the Federal Reserve to raise interest rates on Wednesday.
"There is a 75 percent chance of a 25-basis-point increase, which with no other comment will be a non-event," says Uri Landesman, who helps oversee $350 million at Aaron Fleck & Associates, a money manager firm in Greenwich, Conn.
"There is a 10 percent chance that the Federal Reserve will raise rates by 50 basis points, which will be a little more negative (for stocks)," he adds.
By all accounts, a rate increase has been discounted, meaning the market's prices already reflect it. If expectations come true, stocks should gain in coming weeks, most analysts say.
Almost as important as the decision on rates are any hints the Fed gives about future changes. "We are waiting for any commentary, as the Fed could still say something that will make people uncomfortable," Landesman says.
Landesman has been buying America Online; CMGI, an Internet-venture fund company; and Qwest Communications International, the nation's fourth largest long distance company.
Some investors believe even a 50-basis-point increase might send shares higher in coming weeks as it erases uncertainty about other increases later in the year.
"In some ways a single big move may be preferable, and we may see a relief rally if the move is decisive," says David Bayer, president of Knappenberger Bayer Growth Advisors, a money management firm in Minneapolis.
Stocks were hurt last week as the yield on the 30-year government bond hovered near 19-month highs, indicating bond investors expect the Fed to raise rates more than 25 basis points, or that any rate increase will only be the first of a series.
Higher yields increase the attractiveness of bonds compared with other securities.
Apart from interest rates, investors will be scrutinizing economic reports, including the June employment figure to be released Friday.
"Investors look at the jobs number as a gauge of economic activity," says Michelle Clayman, chief investment officer at New Amsterdam Partners, which oversees $820 million.
"If the Fed jacks rates just a quarter point, and then we see an incredibly strong job number, investors will say there is another 25-basis-point increase coming."
When the Fed raised interest rates by 25 basis points in March 1997, the Dow gained 23 percent for the year.
In 1994, by contrast, when the Fed raised rates six times starting in February, the Dow barely eked out a 2.1 percent gain that year. Those rate increases included two of 50 basis points and one of 75 basis points.
And the Fed raised rates 50 basis points in February of 1995, bringing rates to 6 percent from 3 percent in the 12-month period.
Interest rates aren't the only thing on investors' minds. Some are looking past the Federal Open Market Committee meeting and debating the outlook for second-quarter profits.
"Two converging events are the Fed meeting (and), in the next two to three weeks, the battle of interest rates vs earnings," says Marian Pardo, a portfolio manager with J.P. Morgan Investment Management, which oversees $320 billion.
Pardo, who focuses on small-cap companies, has been adding to his holdings of Cinar, an educational entertainment producer, and Carustar Industries, which makes packaging from recycled paper.
Analysts surveyed by First Call are forecasting that profit for companies in the S&P 500 will gain 11.7 percent in the quarter. That would be the highest growth rate since the third quarter of 1997, when profits grew by 11.8 percent.
The average profit growth forecast for S&P 500 companies has been reduced from 14 percent at the beginning of this year, but Clayman senses that "earnings will come in better than expected."
Warnings on profits so far have failed to dent investor optimism for profit growth.
About 28 companies, including Advanced Micro Devices and Goodyear Tire & Rubber, have warned investors that profits won't measure up to their earlier projections.
Thirteen companies, however, have made positive statements on earnings. They include Georgia-Pacific, which says second-quarter profit will exceed analysts' estimates because of strong home-building and increased demand for pulp, paper and packaging.<<
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