Equity fall is bond market's only hope
Alan Greenspan is playing his cards close to his chest but the expectation is for a 50 basis points ...
Alan Greenspan is playing his cards close to his chest but the expectation is for a 50 basis points rise in interest rates on May 16th. The rise is also not likely to represent a peak in the cycle.
Though recent economic data has been mixed, the bias towards higher inflation looks a touch stronger than that to lower growth.
In any case, equity markets are less influenced these days by interest rates than the textbooks would have us believe. The real struggle for market dominance lies between those who think the telecoms, media and technology momentum has still some months to run and those who believe fundamentals are reasserting their importance in stock market valuations.
At the moment neither side is winning and the result is volatile markets without any significant rise in volumes.
Improved productivity continues to impact corporate earnings and there is a better than fair chance that year 2000 earnings will exceed the 14% average increase for last year. The average will of course hide a pretty mediocre showing by companies that are close to the consumer and bereft of pricing power. Primary beneficiaries in terms of earnings and market favouritism will continue to be out and out growth stocks.
We would be looking for a change in the balance between telecoms, media and technology and traditional growth areas. Pharmaceuticals have returned to favour and financials are starting to look attractive again.
The shakeout on Nasdaq since the middle of March has proved to be a watershed. From now on the dot.com tag is a guarantee of nothing. A clutch of them will be the stars of tomorrow but backing every horse in the race will not yield a final profit. The message is clear - discriminate or disregard.
High bond yields have not tempted investors away from equities and the only likely grounds for a bond rally would be an equity stumble. Main threats to current bullishness could come from ill-judged statements from contenders in the Presidential election, or a psychological reaction to the concept of the techno-economy. Either could be serious but both would prove to be short-term.
Having apparently come through the late March/April correction without any overt signs of a major bear market being in prospect, US equities will be sufficiently shored up by earnings growth to take in their stride this month's interest rate rise. The likely Fed threat/promise of as much again to come before the peak is reached can only increase the current market volatility. For the rest of this year there is a good probability the S&P composite index will comfortably pass its March all-time high and once investors have a clearer picture of when interest rates have topped out it could challenge the 1600 level before the millennium is a year old.
Jackie Bowie, Fund Manager Murray Americas Growth
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