Springtime has been a turbulent season for the US
stock markets. Tech-heavy Nasdaq, which has been
climbing at a torrid rate and reached its high in early
March, fell dramatically by mid-April. The sell-off was triggered
by a combination of things, including the US district
court ruling that Microsoft violated anti-trust laws and
investors becoming nervous about the high valuations of tech
stocks, especially the high fliers that have yet to post profits.
Surprisingly, during Nasdaq’s fall money started to
shift from the New Economy to the Old Economy, which
had been ignored for some time. The Dow Jones Industrial
Average (DJIA) gained over 12% at the same time Nasdaq
was heading south. But then came news that fueled questions
about the bull market coming to an end, or merely a correction
that would eventually allow the bull to keep on
charging. The consumer price index, backed by soaring energy
prices, jumped 0.7% in March. The core rate, excluding
volatile food and energy prices, increased 0.4%, the
biggest gain in five years, showing that price increases have
filtered into many sectors. When those figures were
released on April 14, markets had one of the worst days in
memory: Nasdaq plummeted 9.7% (down 355.49), while the
DJIA dropped 5.7% (down 617.78).
Even though the markets bounced back (Nasdaq and
DJIA up 14.2% and 4.42% in two days respectively), there
are worries that the
US economy could
overheat and push up
the inflation rate. In
the fourth quarter of
1999, the GDP
growth rate soared
7.3%, above acceptable
levels. And
economists expect
the rate for the first
quarter of this year to
come out at about
6% due to heavy production and consumption. The labor
market is tight. Unemployment is still hovering around 4.1%,
but with an increase in jobs averaging 272,000 a month in
the first three months of 2000, many expect unemployment to fall below 4% later this year. Hourly wages for production
workers grew the fastest in two years, up 4.1% in the
first quarter, which if wage increases continue, might put further
pressure on prices.
The Federal Reserve Board, led by chairman Alan
Greenspan, has launched preemptive strikes to head off an
inflation threat, raising the federal funds rate by 125 basis
points since June last year, a gradual process by increasing
short-term interest rates by a quarter point each time. But
with indicators still red-hot, there’s fear that Greenspan will
be aggressive at the next Federal Open Market Committee
meeting on May 16, raising interest rates by 50 basis points.
“That’s where the debate takes place,” says Larry Wachtel,
market analyst at Prudential Securities. “We were expecting
another 25 basis point rise in May, but after recent indicators,
it could be 50 instead. That will be debated all the way
up to May 16.”
Analysts have different views on where the markets are
heading. For tech stocks, Wachtel urges investors to avoid the overvalued
high fliers but get into the buying mode of quality tech
stocks that are established and profit makers. “It’s important
to blend your portfolio with the New and the Old Economy,”
he says, “but I favor New Economy blue-chip stocks. They
represent the future.” According to Tom Yan Leuven, market
analyst at JP Morgan, the investment bank was expecting
“the broad market to be weak this year.” It targeted the
S&P 500 to drop to 1300, below the current level after the
violent weeks around 1400. He suggests trimming down on
tech stocks and moving money into more defensive stocks,
such as consumer staples and energy stocks. He argues that
as interest rates continue to rise, these sectors will be less hit
than some others and that the values are attractive.
Merrill Lynch is digging in for defense. According to the
latest report from Richard Bernstein, Merrill Lynch’s chief
quantitative strategist, volatility in the US markets will not
subside soon, especially in the Nasdaq market with tech
stocks still overvalued. Merrill Lynch has moved from its
traditional diversification model of 60% in equities, 30% in
bonds and 10% in cash to 40%, 30% and 30%. Bernstein
suggests investing less in tech stocks and focusing more on
basic industries, energy, REITs and utilities, stressing their
strong fundamentals.
It is difficult to guess what are the best strategies for the
future. But you can bet on more turbulence ahead.
