Rate Drop Seen Outweighing Slower Profits: U.S.
Stocks Outlook
By Deborah Stern
New York, Jan. 27 (Bloomberg) -- Wall Street is betting that the Federal Reserve
will lower interest rates next week for the second time this month. Judging from
rate cuts in past years, investors can expect a market rally in the months ahead.
Since 1985, there have been five periods in which the Fed reduced rates several
times in a row. In four of those periods, the Standard & Poor's 500 Index began
rallying within a month of the first rate cut and three months later the index was
up an average 8.6 percent.
Fed policy-makers lowered rates by a half-point on Jan. 3 in a surprise move, and
the S&P surged 6 percent over the next three weeks. The central bankers meet
Tuesday and Wednesday, and all 25 bond dealers that trade directly with the
Fed expect another half- point cut, to 5.5 percent. Strategists say the market will
benefit from such a move.
``You can feel with some added confidence that we have indeed seen the bottom''
for the economy and stock prices, said Brian Belski, chief fundamental market
strategist at U.S. Bancorp Piper Jaffray in Minneapolis.
Companies such as Amgen Inc. and Qualcomm Inc. rallied to help lift the
Nasdaq Composite Index 0.4 percent for the week, its third consecutive weekly
gain. The index hasn't put together such a string of advances since the three
weeks ending Sept. 1. The Nasdaq has climbed 13 percent in January after
losing 39 percent last year.
The S&P 500 gained 0.9 percent for the week, extending its gain in 2001 to 2.6
percent after a 10 percent decline in 2000. The Dow Jones Industrial Average
rose 0.7 percent this week and is still down 1.2 percent in 2001.
Rate-Cut Expectations
The anticipation of more rate cuts this year gives investors reason to pour money
into stocks even if profit growth won't pick up for several months, said George
Mairs, who manages $1.3 billion at Mairs & Power Inc. in St. Paul, Minnesota.
``We're in a cycle now where there probably will be further cuts in the months
ahead, and the expectation is more important than the amount of the cuts,''
Mairs said. ``People are willing to pay more for future earnings in a lower
interest-rate environment.''
Mairs recently added to his holding in regional bank Firstar Corp. Banks and
financial-services firms benefit from rate cuts because they spur demand for
loans and lift the value of the bonds banks hold in their portfolios.
The Fed's action on interest rates is helping ease the anxiety some investors had
that the U.S. economy was headed for a prolonged economic slump.
``I don't believe we're headed to a recession,'' said Bill Rutherford, who manages
$100 million at Rutherford Investment Management in Portland, Oregon. ``We're
at or near the bottom.''
Stocks, particularly technology companies, are coming back this year after being
beaten up in 2000, Rutherford said.
Companies that sell equipment for voice and data networks suffered because
some of their customers -- telecommunications companies -- couldn't sell bonds
to raise the money to buy new gear. As rates fall, companies will find it easier to
sell bonds, , Rutherford said.
``As interest rates come down, that pressure is going to ease,'' said Rutherford,
whose largest holdings are computer- related and telecommunications
companies including Cisco Systems Inc., EMC Corp., Sun Microsystems Inc.
and Oracle Corp.
Telecom Stocks Fall
For now, investors are still seeing the effects of that slowdown in
telecom-equipment spending. PMC-Sierra Inc. slid 30 percent this week, the
biggest decline in the Nasdaq 100 Index, after the communications-chipmaker
said sales growth will slow further as demand for network equipment cools down.
Among other network-equipment companies, Broadcom, another chipmaker, lost
16 percent, Ciena Corp. fell 14 percent and Cisco Systems Inc. fell 4.9 percent.
PMC-Sierra has tumbled 70 percent from its March 10 high.
Not everyone on Wall Street is convinced the market is ready to come roaring
back immediately.
The slowdown in profit growth may be so severe that it will overshadow the
decline in interest rates, said Charles Pradilla, SG Cowen Securities Inc.'s chief
investment strategist.
``The Fed easing is clearly the beginning of the market coming back,'' he said.
``However, it's very difficult to time. Everyone was surprised at how quickly the
economy slowed'' after the Fed raised rates in 1999 and last year.
``I don't know if it's enough to eradicate earnings worries,'' Pradilla said of the
prospect of lower rates.
Retail stocks were among the best performers this week after Goldman, Sachs &
Co. analysts raised their ratings on 10 retail and apparel stocks, citing
expectations that consumer spending will pick up in the second half of the year.
The S&P Retail Stores-Apparel surged 19 percent this week, the best showing
for an industry group in the S&P 500. Gap Inc. surged 23 percent, Limited Inc.
gained 19 percent and TJX Cos. rallied 10 percent.
Analysts expect profit growth for companies in the S&P 500 to slow to 0.6
percent in the first quarter of this year and 1.1 percent in the second quarter,
down from an expected 4.4 percent in the fourth quarter of 2000, according to
analysts polled by First Call/Thomson Financial.
Analysts forecast earnings growth will pick up to 7.1 percent in the third quarter.
Companies slated to report fourth-quarter earnings next week include Aetna Inc.,
AT&T Corp. and Xerox Corp. on Monday, Procter & Gamble Co., Halliburton Co.
and Amazon.com Inc. on Tuesday, AOL Time Warner Inc. on Wednesday and
Verizon Communications on Thursday.
Declining Interest- S&P 500 Bottom S&P's Return Three Rate Period Months
After First
Rate Cut in Series 1/3/01 - ? 1/8/01 N/A 9/29/98 - 11/17/98 10/8/98 13%
12/19/95 - 1/31/96 1/10/96 6.5% 7/13/90 - 9/4/92 10/11/90 -18% 5/17/89 -
12/20/89 5/17/89 8.5% 3/28/85 - 7/11/85 4/8/85 6.5% |
