Stock Market News for May 2004

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April is the cruelest month according to T. S. Eliot. And though he did not have the financial markets in mind when he penned this line, many investors might well agree with him. Volatility was the watchword for April. Not only was the market choppy-- as quarterly earning season often is -- but Wall Street was also assailed by interest rate concerns in the latter part of the month. As a result, small investors were dismayed to see many big traders selling off to take short-term profits.

Now the bull market has passed the 18-month mark, the big question is how much longer can it continue? For the most part, Wall Street experts caution small investors against "knee jerk" sell-off reactions. Big block traders are driven by motives and concerns that small investors do not share. Seeking to anticipate and out-maneuver their competitors, they sometimes shift large blocks of stock in response to relatively small changes in individual stock prices. Most analysts recommend that small investors focus more on the economic "big picture" than on short-term profit taking from the big players. On the positive side, they note that big traders seem to be sanguine about the economy right now despite some interest rate concerns. For the most part, the experts urge smaller investors to take note of how the professionals react to a profit report, but-unless the report contains an unwelcome surprise --to sit tight and wait-out these ripples.

Interest Rate Hike
April saw some good indicators of economic strength. Orders for manufactured goods rose by a healthy 3.4 percent in March, durable goods orders surged and job growth looked good. Ironically, these positive indicators -- together with reports of higher consumer prices --added fuel to inflation worries that, in turn, added further weight to the likelihood of interest rate hikes. The market took Federal Reserve Chairman Alan Greenspan’s remarks before Congress in mid-April as proof positive that increases were on the way. Greenspan noted that the U.S. economy had entered a time of "more vigorous expansion" and said that rates must rise at "some point" to prevent pressures on price inflation emerging. Bull and bears both seem to agree that "some point" means the long-anticipated rate hike will happen in summer when the Fed will raise the federal-fund rate (interest charged on overnight loans to banks).

What does this mean for the stock market?
Not a lot, according to many bullish analysts who believe that the anticipated interest rate hike is already priced into the market and that the recent market gyrations are more related to interest rate expectations, anticipation and uncertainty than any real fears of adverse consequences.

That having been said, analysts note that rate hikes traditionally spell bad news for the retail and financial sectors. Conversely, many pundits also note that consumer staples (slower growing businesses in well established industries) that fell out of favor last year, are worth taking a look at in the light of the projected increase in interest rates. Experts also note that the consumer staples sector out-performed Nasdaq and the S&P 500 for most of the first quarter of 2004.

Many Wall Street experts believe both the economy and the market have the power to perform well over the months leading up to the presidential elections-barring major geopolitical problems. They urge patience, noting that the market absorbs news quickly, and they predict that recent earnings-related volatility will be short-lived.


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