ANALYSTS: BENIGN INTerest RATE OUTLOOK BUILDING IN US STOCK MARKET
--Yet Some Do Warn of Sequential Quarter-Point Hikes, or Worse
By Mark Pender
NEW YORK (MktNews) - Expectations are growing in the U.S. stock market that Federal Reserve policy will pose no significant threat to share prices for the foreseeable future, based largely on the absence of meaningful inflation and the unfolding presidential campaign.
Minutes from February's Federal Open Market Committee meeting, released late last week, showed that some members had called for an aggressive 50 basis point hike to help insure against an emergence of inflation. Talk circulated in the stock market Monday morning that the Fed, rumored to be disappointed over the strong equity rally, would lash out with such a hike before the next policy meeting on May 16.
But concern over a more aggressive Fed policy stance is widespread and the rumors did little to stem the market's animal spirits. Expectations remain entrenched that one, and no more than two, quarter-point hikes stand between now and the November election.
"One quarter-point hike has been discounted for the May meeting, while a second quarter-point hike in June is still up in the air," said Joe Liro, equity analyst at Stone & McCarthy Research Associates. Because of favorable rate expectations, Liro believes the market is poised for solid gains through most of April.
Pointing to an absence of inflation, Liro downplayed the hawkish sentiment voiced at the February FOMC. "There was some restlessness on the reservation but Greenspan kept things in line," he said.
Art Hogan, chief market analyst at Jeffries & Co., believes expectations for a half-point strike are "not credible". He emphasizes that the high price of oil, instead of posing an inflationary risk, will instead prove to have slowed first quarter growth. He also believes that pressures from high employment have peaked.
Hogan in fact says even a rate hike at the May meeting is not a lock, putting the odds at only 60-40. "We may have credible evidence by then that the economy has slowed down .... I see plenty of daylight, I'm completely bullish," he said.
Such sentiment is not the exception. Many emphasize that the gains in the market are justified and the related wealth effect overstated, and that in any case the pending election campaign will put the Fed, cautious not to influence the election, on ice till at least the mid-November policy meeting.
But opinion isn't uniform. Some in the market say the threat of significantly higher rates is real. "I think we could see three or four consecutive quarter-point hikes, and I wouldn't rule out a 50-point move somewhere along the way," said Chuck Hill, director of Research at First Call. Hill says profits at U.S. companies are near record levels and are in any case more impressive than prior records given unfavorable comparisons.
"Earnings prospects (for the first quarter) don't get much better than this. There's been few disappointing pre-announcements, and analyst revisions have been much better than normal," Hill said. He says first-quarter earnings among the S&P 500, bolstered by roughly 30 percent gains among technologies, may rise 21 percent year-on-year. This compared with a 7 percent historical average and a record 21.7 percent rise in third quarter 1999 which came with easy comparisons.
"Things haven't tapered off as much as expected, which is good news I guess, unless you're the Fed," Hill said, noting that the lagged effect of the Fed's previous rate hikes still has a chance of slowing profits down.
But Hill believes the Fed faces a tough challenge in managing a soft landing, greater than in 1994 when economic momentum wasn't as great.
"A quarter-point or two doesn't seem to have much impact, and if we see a half-point I think the market is vulnerable," he said. It's the prospect of a 50 basis point hike, the lack of recent response market notwithstanding, that Hill warns could be the tripwire for a significant reversal.
Hill believes technology stocks are in a bubble, comparing the current market to his memories of the 1969 and 1973 reverses. "There's little doubt that we're in a bubble. Some surge is justified but it's been carried to extremes." Though it's "normal" for markets to overshoot when new technologies appear, Hill said in this case "it's a bigger bubble than usual."
"In 1969 it was mainframes. The same deal. People think that price-to-sales ratios are new, well they're not. I used to calculate them," he said.
Yet Hill's rate view is in the minority as are his worries over a bubble. By far most dealers and analysts say strong consumer demand, high U.S. productivity, and the retooling of the global communications network justify further gains in equity prices.
But others, like Charles Biderman, founder of TrimTabs.com, share Hill's concerns. Biderman warns that high margin debt points clearly to over-speculation and puts the U.S. market at risk of a Nikkei-style collapse of the early 1990s. "Remember Nikkei 40,000? It's never been back," reminds Biderman. |
