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Portfolio strategy update CURRENT MARKET NEWS
Editor’s Note: The following portfolio update is from David Gottstein’s monthly Dynamic Research Group’s newsletter. It was compiled in April. Earnings and interest rates........ still
The broad stock market (the DOW and the S&P 500) has suffered a classic correction at the behest of Federal Reserve Chairman Alan Greenspan. He has put the market formally on notice that he intends to keep raising interest rates until the economic and stock market bubbles abate, and in doing so, he has spoiled the nonstop party.
Even so, technology leaders continue to rise and lead the Nasdaq to new heights, although only a handful of issues are really participating.
Among the value, growth and momentum players in the market, it is indeed the momentum aspect that has been driving the market forward. Even the institutional players have supported this speculative investment approach.
Our fear is that when these participants, who have never suffered a bear market, start to feel pain, they will abandon the market in droves and lead the market much lower than it is today.
We think that this is possible, but that a recession is not in sight. Greenspan only wants to lower growth from the just reported, heartburn inducing 7 percent level to a more manageable 3-4 percent growth rate. His decision to adjust the market with a series of small interest rate rises to curb growth is probably healthy in the long run. It will help to take the speculative hot air out of the market, and it will dampen earnings growth to a 10 percent growth rate instead of the 20 percent we are continuing to experience.
We believe that interest rate fear has already done much of its damage to the markets. Unless inflation does come back in strength, Greenspan will be able to measure his responses and backtrack if his moves seem to be too aggressive. He is taking this action because economic growth, at least domestically, continues to soar. The average stock is still racking up 20 percent earnings gains. Greenspan doesn’t want to stop earnings growth; he just wants to curtail it.
Once this interest rate factor is reflected in prices more fully, we should experience a continuation of the bull market. That is why, at these corrected stock levels, we have increased our exposure to a fully invested 97.5 percent invested posture. It may be a bumpy ride, but all systems are go for long-term investors, and many high quality stocks are now at very attractive sale prices.
Something to worry about! The one fundamental that could spook the market further is a disruption in global political balances.
With Mainland China rattling its swords towards Taiwan, the specter of regional hostilities has increased.
Is this real? Of course, it is too early to tell.
The U.S. response, in the last year of Clinton’s presidency, is speculative at best. We wish to merely give a word of caution that the western world has exposure in this part of the world. It will pay to keep close tabs on this important situation.
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