Stocks: Waiting to exhale

Stocks fell this past Monday ahead of the two day United States Federal Open Market Committee meetings held on Tuesday and yesterday. The professional money managers and hard core investors sold off, getting into position for yesterdays announcement from the US FED on short term interest rates as well as their comments as to how the US economy is progressing. The market had already factored in a quarter or half-point cut, but more important are the comments on the economy. We will give you a summary of Alan Greenspan’s comments in next week’s article. Looking back at last week, the global markets made another steady week by week gain on further signs of improvement in the US economy. Since mid March, the major markets have showed steady gains with all equity indexes from Blue Chip to small caps registering similar controlled gains. The German DAX and French CAC, arguably the economies in the worst shape in the European Union, turned in the best equity index performances last week, showing 2.2% and 2.5% rise respectively. The UK and the US logged smaller gains, more in the 1% growth range. We note that the broad-based S&P 500 Index closed above 1,000 last week for the first time in almost a year. For the contrarians, who had the courage in March to invest in equities as we had recommended, are now sitting on substantive gains and some are wondering just how sound the current prices are given the dramatic rise stock prices. To look at the UK’s FTSE 100 as an example, the index gained 28% over the past 14 weeks. The smallest companies on the main market (those in the Fledgling index) have risen by 29.5% since March 12.

The UK Small Cap index is up 31.2% while the best returns of all have been registered by the companies just outside the top 100 tier, the FTSE 250, which is up 33.7% from its low. It all comes home if you look at the historic Price Earnings Ratio for the FTSE 250, which on March 12 was 18.1 and today with the higher stock prices is actually down to 17.7. In the US, economic news this past week, consumer prices, excluding food and energy, rose by 0.3% in May, alleviating investor concerns that deflation might slow economic growth. The rise was three times higher than the median forecast and was boosted by higher consumer sentiment. The Conference Board’s index of leading indicators increased by 1% in May, as production expanded and initial jobless claims fell. The survey raised hopes that the US economy would improve in the next six months. In the UK, inflation slowed in May to a rate of 2.9%, down from 3.0% in April. A lower oil price helped ease the rate, which remained above the Bank of England’s target of 2.5%. UK retail sales fell for the first time in four months during May mostly due to high declines in sales of clothing and foot wear. The news raised speculation that the Monetary Policy Committee might cut interest rates, which remain the highest in Europe by over 2%. The last interest rate decision by the UK Monetary Policy Committee of the Bank of England showed the members voted 6-3 in favour of no change but the outcome was defined as “finely balanced”.

In Europe, European Central Bank economists have aggressively reduced growth forecasts for 2003 to 0.7%, and to 1.6% for next year. The pessimistic prediction together with sympathetic comments from European Central Bank executives have raised hopes that further monetary easing may be provided, particularly if inflation continues to fall away from the banks price stability target of 2.0%. Hong Kong has been removed from the SARS infected list by the World Health Organisation in response to the fast falling number of infected in the region. The Hong Kong authorities have announced HK$1 billion package to promote the territory globally and to build confidence among prospective investors. There appears to be a significant resurgence in positive sentiment towards shares. Positive comments on the US economy from Greenspan this week would set the stage for improved consumer sentiment and business spending, the two key factors which we are watching to indicate improved corporate profits and earnings.
E-mail: darcy@investments-intl.com