The major indices posted mild gains Monday, thanks to a batch of merger news and a dip in crude oil prices. But investors were mostly holding their breath ahead of key appearances this week by
Chairman Alan Greenspan.
What everyone wants to know is if the Fed is nearly done with raising interest rates and, if so, will that prove to be a boon for investors. The answer may be just around the corner. Greenspan is speaking twice this week, first on China on Monday night, and more importantly on Thursday, when he testifies to Congress on the state of the economy.
The testimony comes at a crucial time for the market, which is in the midst of a six-week rally that needs new fuel to keep going. Whether the recent market gains continue or the gains melt away, possibly leading to fresh lows, could well be decided this week.
In the meantime, an uncommitted market struggled to push the
Dow Jones Industrial Average
up 6.06 points, or 0.06%, to 10,467.03 on Monday.
gained 1.49 points, or 0.12%, at 1197.51. The index benefited from support for financial issues after news of a merger between two banking giants, although shares of the participants fell.
announced a deal to buy
( PVN) for $6.45 billion.
Other merger deals included
buying two divisions of
for $2.28 billion, and
( CDX) for $3.6 billion.
It also helped that the price of crude oil fell back Monday after rising 3% last week. The July contract lost 54 cents to $54.49 a barrel.
meanwhile, rose 4.33 points, or 0.21%, to 2075.76. Even the technology sector, which has led the recent rally in stocks, seems out of fuel.
, for example, slipped 0.8% after suffering an apparent sell-the-news reaction to
confirmation of reports it is going to use
chips in its Macintosh computers beginning next year. Intel shares slipped 0.6%.
Market internals were positive, with advancing issues outpacing declining ones 19 to 13 at the
New York Stock Exchange
and 16 to 13 at the Nasdaq. But light volumes both at the NYSE, where 1.2 billion shares changed hands, and on the Nasdaq, where 1.5 billion traded, bore witness to a lack of investor conviction.
A Matter of Timing
Almost two months ago, Tom McManus, equity strategist at Banc of America Securities, saw enough signs of fear in investors to offer a buying opportunity as he hadn't seen in two years.
In reaction, McManus raised his equity allocation to 60% from 55% in mid-April -- an almost perfectly timed move that preceded the recent rally in the major indices. Since then, both the Dow and the S&P 500 have rallied 4%, and the Nasdaq advanced 8%.
But the run-up, McManus believes, is now nearly over. He cut back his equity allocation to 55%. Why? Overbought indicators are flashing at least orange on his screens as investor sentiment has turned positive. "Investors are hoping that historical stock market performance after the Fed has wrapped up its rate-hiking program is now in store," McManus wrote to clients. "We don't agree."
Those hoping that the Fed may soon call it a day received new ammunition last week. The key Institute for Supply Management manufacturing survey dipped closer to contraction level. Perhaps more importantly, Dallas Fed President Richard Fisher -- a new voting member of the Federal Open Market Committee -- hinted that the Fed might be close to the end of its rate tightening cycle. Finally, Friday's dismal employment report provided more fodder for those thinking the Fed will (or should) stop tightening soon.
Now bearishness on the economy is being turned into a bullish call for those hoping that the end of rate hikes will end the uncertainty that plagued stocks for the first three months of the year.
Merrill Lynch chief North American economist David Rosenberg sits in that camp. He believes the Fed will call it a day either at the end of June or at the August meeting at the latest. He's not advocating adding to growth stocks or other risky positions, however, but says investors would do well to focus on defensive and rate-sensitive issues.
Historically, he says, the best performing sectors in a post-tightening phase have been utilities, banks, real estate, pharmaceuticals, tobacco and food and beverage producers. Some cyclicals also make the cut, including capital goods producers, and the entertainment and accommodation sectors. By contrast, the worst-performing sectors were autos, building materials, resources, retail and transports, Rosenberg notes. Typically, cyclicals start making it back on the list of outperformers only in the run-up to a Fed rate cut, which the Merrill analyst expects to happen in the first half of 2006.
Of course, it's a very different story for those, myself included, who believe that the economy might be slowing but that the Fed will nonetheless continue raising rates past current market expectations.
There are plenty of reasons, but perhaps they are best summarized by a bearish research note on the retail sector by J.P. Morgan's global equity strategist Abhijit Chakrabortti. "Real
inflation-adjusted rates are still unnaturally low and should continue to rise from here discouraging consumer borrowing," Chakrabortti wrote.
In addition, he says unit labor costs rose at 4.3% in the first quarter, which should cut into corporate profit margins and reduce worker compensation and employment going forward.
It's not an ideal environment for stocks to make a convincing move upwards. Of course, those who say that stocks can soon surpass their March highs believe there's still enough residual pessimism and uncertainty to fuel further gains.
Perhaps that uncertainty will continue if Greenspan remains vague, in his trademark fashion, when speaking about the economy this week. But after Fisher's comments, he likely will feel compelled to set the record straight, either way.
And for Bank of America's McManus, the belief that the Fed will be done at the end of June is simply yet another symptom of too much investor optimism. That belief also has led to the impressive rally in Treasury bonds over the past few weeks -- a rally that, it must be said, was completely missed by McManus. Bonds have been, and remain, absent from his portfolio.
On Monday, the benchmark 10-year Treasury bond gained another 5/32 while its yield dipped to 3.95%.
The bond market, McManus says, will eventually come back to reality. "I don't see a path for bond yields to follow over time, but bonds are a bad deal right now," he says, adding that he expects the Fed to raise the funds rate to 3.75% by year-end.
As for his favorite stock picks, they include large-cap steady growth companies that should yield more attractive returns than the 4% to 5% offered by bonds. These include the likes of
Procter & Gamble
For the rest of the market, there's "a little bit of speculation going on" -- too much to make it attractive, McManus says. "I wouldn't necessarily point to
but simply the very nice run-up in all the major averages."
To view Aaron Task's video take on today's market, click here
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
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