Experts Predict Stock Performance
Saturday, 14 November 1998
N E W Y O R K (AP)
IT DOESN'T matter what the Federal Reserve decides next Tuesday about
interest rates - stocks should do well into the end of the year even if
Greenspan & Co. don't push rates lower for the third time in less than two
months.
That prediction comes from Wall Street analysts who, despite their
apparent nonchalance, are still taking sides around the crystal ball.
One side argued this past week that the Fed will again lower rates in a bid
to prop up recent fragile advances in foreign financial markets. Another
camp believes the Fed's priority is the domestic economy, which continues
to hum and doesn't need the stimulation that lower rates would provide.
The Fed first lowered its target for the federal funds rate, the interest
charged on overnight loans between banks, by 0.25 percentage point in
late September.
On Oct. 15 it followed with a surprise cut of 0.25 percentage point in the
discount rate, which it charges its member banks, to 4.75 percent. It also
dropped fed funds another 0.25 percentage point to 5 percent.
Invoking years of history from the annals of Fed-watching, many
economists believe the Fed won't stop with two small rate cuts but clip
them again Tuesday.
Although they ended up supporting domestic stock prices, both earlier cuts
were aimed more at propping up weak global markets than they were at
Wall Street, said William Meehan, chief market analyst for Cantor
Fitzgerald in Darien, Conn.
A third rate cut could finish the job, by giving an extra boost to foreign
currencies that have been rising against the dollar and to fixed-income
markets in places like Korea and Thailand, where interest rates have fallen
dramatically. It would be especially important to Brazil, which won a
commitment from the International Monetary Fund Friday for financial
assistance worth $41.5 billion.
"It's not going to do a heck of a lot of good to the emerging markets to
provide $42 billion for Brazil, or to keeping things on a relatively even keel
here, if the Fed fails to lower rates one more time," Meehan said.
A rate cut would lower corporate borrowing costs and could stimulate
further domestic economic growth and support corporate profits, both
happy outcomes for the stock market.
But while bond investors are counting on a rate cut and have priced it into
bond prices, it may not be so crucial for stocks, other analysts said.
On Friday the Commerce Department said retail sales advanced a strong 1
percent in October, the biggest increase in five months, indicating
consumers are still confiden as they head into the holiday season. That
prompted some analysts to assert that the Fed won't risk stimulating
inflation by easing credit, or lower rates, again.
By not easing, Fed bankers would send a signal that they believe the
economy is strong and that the stock market doesn't need their help. And
stock index figures would bear that out. The Dow closed Friday's session
at 8,919.59, up 89.85, but down 55.87 for the week. That is below its
all-time closing high of 9,337.37 on July 17, but up 18 percent from 7,539,
where it closed Aug. 31 after Russia stunned the world by devaluing its
currency by 85 percent.
"It is the return of confidence to the market that would make them not
ease," said Charles H. Blood Jr., senior financial markets analyst at Brown
Brothers Harriman & Co.
Peter Anderson, chief investment strategist at American Express Financial
Advisors in Minneapolis, said there is a 50-50 chance the Fed will ease
Tuesday.
One reasonable position, Anderson said, is that "things are looking better,
we may not a need to cut, there's a bubble in the economy and further
easing would exacerbate it."
But, Anderson said, "real economies overseas are still fragile and may need
further bolstering."
Anderson said the Fed might cut rates another quarter-point on Tuesday
but then say this will be the last cut for three or four months. "I think the
market might take that negatively."
And Blood believes the Fed may compromise, which it is famously able to
do, by cutting fed funds another quarter-point to make it even with the
discount rate at 4.75 percent. "That would be one way of conveying the
idea that we're basically finished," he said.
The Standard & Poor's 500 rose 8.03 to 1,125.72 Friday, but was down
15.29 for the week.
The Nasdaq composite index declined 3.07 to 1,847.99 Friday and 8.57
for the week.
The New York Stock Exchange composite rose 3.61 to 556.17 Friday
but fell 8.93 for the week; and the American Stock Exchange composite
rose 1.48 to 668.36, and fell 2.44 for the week.
The Russell 2000 index of smaller companies fell 2.84 to 389.36 Friday
and 10.96 for the week.
The Wilshire Associates Equity Index, the market value of NYSE,
American and Nasdaq issues, closed at $10.31 trillion Friday, down
$147.887 billion for the week. A year ago the index was $8.82 trillion. |
