Alan Greenspan stuck to his script on measured rate hikes, which led the dollar to rally and bond prices to fall this week. But stocks struggled amid disappointment that Greenspan didn't give a clear sign the
will be done tightening anytime soon.
For the week, the
Dow Jones Industrial Average
rose 0.5% and the
advanced 0.2%. But the
On Friday, the Dow rose 9.61, or 0.09%, to 10,512.63, supported by
, which jumped 8.5% after the United Auto Workers agreed to discuss members' health care benefits. But the S&P 500 fell 2.82 points, or 0.23%, to 1198.11 and the Nasdaq dipped 13.91 points, or 0.67%, to 2063.00.
All Tech, All the Time
Tech remained the most talked-about sector -- amid upward guidance from
and new stratospheric price targets on
. But the sector's leadership role is coming into question. Both Intel and Google (and the chip and Internet stocks generally) have seen huge gains since their April lows -- more than 20% for the chip giant and over 50% for the online search engine. But a number of previously hot stocks such as Google and
struggled this week, evidence -- perhaps -- that the tech sector's recent leadership may be ending.
For several weeks, calls predicting the coming end of the tech-led rally have multiplied. On Monday, Banc of America's cautious strategist Tom McManus cut back his equity allocation to 55% from 60%. In mid-April, he had raised his equity position after sentiment indicators had hit lows.
By Friday, it was the turn of investment guru Don Hays of Hays Advisory to predict that stocks will head south sometime in the first half of July. "It is too late to buy, even though a little too early to prune, but pruning time is not far away," he says.
But thus far, stocks remain an attractive gamble to the majority -- especially the more risky bets in the tech sector -- as long as bond yields remain so low.
Of course, that may be about to change. After touching a low of 3.80% last Friday, the yield of the benchmark 10-year bond came back above the key 4% level this week. The yield stood at 4.04% Friday, after a narrower-than-expected trade deficit in April and revisions for March were bullish for growth and seemed to confirm Greenspan's statements the previous day.
In his prepared remarks to Congress, the chairman reiterated his view that while underlying inflation is contained, the economy remains on "a reasonably firm footing" and the Fed believes it can continue raising rates at a "measured" pace.
Greenspan also repeated his belief that the economic softness seen earlier this year was transitory. On the face of it, the comments were at odds with market expectations that the Fed is nearly done with raising its year-old rate-hike campaign.
But the rise in the 10-year's bond yield above 4% this week has to be put in the context of its sharp fall from 4.6% since late March. Maybe it was simply profit-taking. Those that have bet against bonds, and rate-sensitive stocks such as homebuilders for that matter, have been consistently wrong over the past year.
As the 10-year yield moved up this week, the Philadelphia Stock Exchange Housing Sector Index took a breather, finishing flat. It was the same for homebuilders
, however, rose nearly 2% after announcing a stock split.
Bond traders, and the homebuilders, undoubtedly reacted to Greenspan's interventions this week. But at the same time, long bond players must have enjoyed the fact that Greenspan appeared resigned to the idea that global bond yields, led by U.S. Treasuries, will stay low.
Asked Monday night if he believes long bond yields will rise anytime soon, Greenspan said: "I would think not."
Even at 3.9%, the 10-year Treasury's yield is still advantageous compared with its international equivalents. And as Fed policy keeps a tightening bias for the foreseeable future, U.S. Treasury bonds and the dollar are even more attractive. On Friday, the greenback had surged to a nine-month high against the battered euro, which traded at $1.212.
Recent dollar strength may help reduce import prices but it may bring nasty surprises, just as investors start turning to the outlook for second-quarter earnings. In a survey of companies covered by Morgan Stanley, 55% of respondents said that the firmer dollar would depress their earnings "somewhat" in the coming quarters.
No Housing Bubble, Yet
Sticking to the domestic economy, there's much less to worry about the housing sector. As long as long bond yields remain low, it should encourage new mortgage applications and send housing prices and the stock of homebuilders into levels that even Greenspan would qualify as "bubbly" instead of merely "frothy."
On Wednesday, the Mortgage Bankers Association reported that the mortgage applications index rose 6.5% in the week ended June 3, thanks to a jump in refinancing activity.
Perhaps that explains why Greenspan did not sound that concerned this week about a possible inversion of the yield curve, which happens when short-term bond yields -- which move in tandem with the Fed's key rate -- move above long-term yields.
On Monday night, he said that given the global dimension of the U.S. Treasury market, the Fed would not necessarily read an inverted yield curve to mean what it traditionally signals: that a recession is coming.
The chairman might have been speaking his mind, partly. According to Michael Gregory, fixed-income strategist at BMO Nesbitt Burns, while there is a serious likelihood that the manufacturing sector dips into a recession, the U.S. economy remains driven by housing strength and mortgage refinancings. Perhaps it is different this time. Or, at least, it will be different until after Greenspan takes leave in January 2006.
On Thursday, Greenspan downplayed the impact that declining housing prices and slowing consumption may eventually have on the broader economy. Business spending will eventually pick up the slack, Greenspan said. Of course, it will be up to his successor to verify that prediction -- or clear up the mess if it proves faulty.
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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