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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: T L Comiskey who wrote (29690)	1/23/2001 1:24:28 AM
From: Mannie	Respond to of 65232

Joe Battipaglia Chairman of Investment Policy Weekly Perspective January 22, 2001 I am encouraged by last week’s economic data showing an economy not in a freefall as well as the reaction of many stock prices to recently announced earnings. Stable levels of spending coupled with easing inflation, falling interest rates and a sharp reduction in new production during December has advanced the recovery process. I expect to see rising production levels with each passing quarter along with a commensurate acceleration in profit growth beginning with the second quarter. Sources of additional earnings growth should come from rising export demand and better foreign results. For the month of December, core consumer prices advanced by a less than expected 0.1% - a sharp decline from the 0.3% pace in November. The increase was the most modest in a year and I expect this trend to continue pushing the run rate for core inflation under 2%. Last week’s Q4 reported earnings from IBM, Nortel, Bear Stearns, Lehman Brothers and Alcoa, suggest that there may be some life left on the earnings front after all. Of course not all companies fared as well, particularly those tied to deeply cyclical industries such as automobile manufacturer Ford Motors and supplier of housing materials Home Depot. On balance, however, the results were not all that bad. Based upon data provided by Briefing.com, more than 80% of companies that reported between January 1st and January 18th met or exceeded analyst’s expectations. Of the reporting companies, the median year-over-year growth in reported earnings was 11.9% - somewhat better than the consensus view for Q4 results. While we are still in the early innings of the reporting game it appears that this is not the “nuclear winter” scenario. Beyond the earnings and economic data, the next important date on the calendar is the January meeting of the FOMC next Wednesday. I expect the Federal Reserve to further lower short-term interest rates by at least 25 basis points and maintain an easing bias. I believe that another 100 to 125 basis point reduction is likely before the Fed finally completes it’s work. As this happens, recession fears should fade as consumption and business spending respond well to easing credit. So what should investors expect once the economy turns the corner? Can the bull market regain it’s footing? Absolutely. I believe a continued bull market with lessened volatility is the most likely course. Part of the reason remains a growing economy, rising earnings and stable prices, but a less invasive Federal Reserve should also help most financial assets perform well. Recent history illustrates this point. Throughout the first half of the 1990’s, for example, the S&P 500 gained roughly 12% annually and volatility remained relatively low. It is worth noting that market volatility was at it’s lowest during 1993 – the year the Federal Reserve took no action on interest rates. The second part of the decade, however, brought with it an increasingly inflation wary Fed, a period of global economic crisis, political tumult, and the explosive rise and fall of “dot com” mania. Despite all this, the S&P 500 managed to accelerate it’s annualized rate of return to 16% despite a big pickup in daily market volatility that almost doubled (see chart) from the 1990-1995 time period. With the Federal Reserve set to provide a more gentle handling of the monetary tiller, I believe the stage is now set for more normal relationships between stock prices, earnings growth and prevailing interest rates. Already, the Federal Reserve’s attempts to ease short-term interest rates have helped to restore order to the bond market by allowing the yield curve to assume a more normal shape. In a few short weeks, the spread between ten year and two year treasury yields has widened to around +40 basis points from a range of –10 to –20 basis points last year. The average spread over the past several decades has been near +60 basis points. For most of last year, the yield curve remained inverted as short-term rates were held unusually high by the Fed and longer dated maturities were repurchased as part of a government plan to reduce the country’s outstanding indebtedness. In this environment, individual investors should continue to focus on stock selection over indexing as the preferred method for building out a portfolio. The criteria for stock selection remain the same. Successful companies must consistently meet or exceed analyst’s expectations for earnings, be willing to repurchase stock with excess cash, drive productivity through the adoption of new technologies, and build global relationships through mergers, acquisitions and strategic partnerships.