Buying on the dip' may not be smart move-Vanguard
NEW YORK, Feb 24 (Reuters) - ``Buying on the dip,' the conventional wisdom that has rewarded investors and helped the stock market regain its footing several times over the last few years, may not be a sure-fire way to make a few bucks, says one of the leading mutual fund companies.
``It is a concern to us,' Brian Mattes, a principal and company spokesman for Vanguard Inc., said on Thursday. Malvern, Pa.-based Vanguard is the second-largest mutual fund company in the United States. ``It may be a fast way of making a couple of percent gain but it is not a sure thing,' he said.
``We're not predicting a bear market,' Mattes said. But he added, ``at some point you may not see the immediate rebound
you have been seeing.' He said the market could fall 2 percent or 3 percent, slide down anther 5 percent or so, and stay depressed for a year.
In the third quarter of 1998 the stock market fell 20 percent from peak to trough but then recovered over six months, Mattes noted.
He said that on days when market averages drop 1.5 percent or 2.0 percent, the firm has noticed investors doing increased buying on the following day.
On Thursday, when the Dow industrials slipped below 10,000 several times and closed down 133.10 points at 10,092.63, the volume of telephone calls to Vanguard came in exactly as forecast and was consistent with past behavior, Mattes said.
The Standard & Poor's 500-stock index unofficially fell 7.26 to 1,353.43, a drop of 0.53 percent.
A spokeswoman for Strong Capital Management, which has a Dow 30 Value Fund, said call volume on Thursday was ``a little more modest' than normal. ``We've seen higher spikes in the last couple of months,' she said. ``Our shareholders are treating it like somewhat normal market activity,' she said.
Strong, based in Milwaukee, has 45 funds in all. The $115 million Dow 30 fund has the 30 Dow industrials with half of the fund mirroring the index and the other half actively managed.
The Vanguard 500 Index Fund, the Vanguard flagship, had about $100.38 billion in assets as of Jan. 31. It was a close second in size to Fidelity Investments's Magellan Fund.
FOCUS-Significant Fed move on rates possible-official
(Adds St. Louis Fed Poole quotes)
PLYMOUTH, Minn., Feb 24 (Reuters) - The Federal Reserve may be heading toward a ``significant' move to raise interest rates but it will make the changes in gradual steps, Minneapolis Fed President Gary Stern said Thursday.
Stern's comments provided further evidence that Fed policymakers think they may need to raise rates substantially in the coming months to slow the robust U.S. economy and keep inflation from taking off.
``It is quite possible that over time, a significant change in policy might be implemented, albeit on a gradual basis,' Stern told the Plymouth Rotary Club.
The U.S. central bank has already raised the key federal funds rate on overnight lending between banks four times since June, bringing the rate from 4.75 percent at the start of the credit tightening to 5.75 percent currently.
Wall Street is now bracing for more rate hikes in the coming months and top Fed officials have not been bashful about warning that they will continue to act until the rapid-fire pace of domestic demand slows.
Fed chairman Alan Greenspan said in testimony to U.S. lawmakers this week that there was little evidence the rate hikes so far were slowing the economy to a pace the Fed feels comfortable with.
He made clear that he thought the rate of growth in the second half of last year -- nearly six percent on an annual basis -- could not be sustained without generating inflation.
Both Stern and St. Louis Fed President William Poole, who spoke at a separate event at Saint Louis University, said they did not see a threat to the economy from broader inflation as a result of higher oil prices.
Growing world demand for oil, and not production cutbacks, was the driving force pushing prices up, Poole said. But despite oil prices, inflation was benign in January, he added.
Poole said tight monetary policy that keeps inflation under wraps will keep interest rates lower in the long run, and he
dismissed the the notion that higher interest rates depress economic activity.
Both Stern and Poole are non-voting members of the Fed's policy-setting Federal Open Market Committee this year.
One of the Fed's preoccupations these days is that a tremendous run-up in stock prices in the past few years has created a ``wealth effect' where consumers spend more as their paper wealth grows.
Fed officials fear wealth effect spending is fueling demand in excess of supply in the U.S. economy and this imbalance could trigger inflation.
But Poole said it was not clear the U.S. stock market is overvalued and it was hard to say what implications any fluctuation in stock prices would have for Fed policy.
``It's not obvious the stock market is overvalued. I don't know what the right price for the stock market is,' Poole said.
``There is so much uncertainty about the stock market that increases or decreases in the stock market do not in any way drive me...to believe that there should be any easy or quick (monetary) policy conclusions that would flow from it.'
The Dow Jones industrial average, the key U.S. blue-chip stock index, has seen a bout of weakness so far this year, even while technology stocks on the Nasdaq composite have been soaring to eye-popping record highs.
Stern said it was too early to draw any conclusions about the impact of the Dow's decline on the broader economy. ``I don't think the decline we have had is enough to matter quantitatively, because you could reach different conclusions.'
By the close of trade on Thursday, the Dow was down more than 12 percent since the start of the year while the Nasdaq was up about 13.5 percent.
Exchanges raise red flag on margin
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