Interest rates are rising, no matter what the Fed does, which means stock investors are in for more tricks than treats in October, market experts say.
No one's predicting there will be a repeat of Black Monday -- Oct. 19, 1987, when the Dow plunged 508 points, or 22.61 percent, to 1,738.74. But this month could leave its mark on stockholders who have grown used to the good times.
"It's a bad start," said Hugh Johnson, chief investment officer at First Albany Corp. "What's troubling is we're starting October with some fairly grim fundamentals. We're seeing early warning signs of inflation."
The latest warning signal, Johnson said, was flashed by the National Association of Purchasing Management, which gave stock and bond markets a jolt Friday. NAPM's September index of US manufacturing activity rose to 57.8, much stronger than economists had expected, from 54.2 in August.
More troubling to Wall Street was the jump in NAPM's prices-paid index, which measures the prices that manufacturers pay for goods and materials, to 67.6 -- its highest level since May 1995 -- from 59.8 in August.
The surge in the closely watched NAPM prices-paid index was particularly troubling since it came just two trading days before Federal Reserve policy-makers meet. And one of the people who watches this piece of data the most is none other than Fed Chairman Alan Greenspan.
"The Federal Reserve may raise short-term interest rates," Johnson said. "A day ago, no one would have thought it."
Thursday, US stocks rallied as portfolio managers did their "window dressing" or bought more large-cap stocks to enhance fund performance on the last day of the third quarter.
Michael Metz, managing director and portfolio manager of CIBC World Markets, isn't losing any sleep over what the Fed decides.
"I don't want to sound flippant, but I don't think it matters a damn what the Fed does," Metz said. "Interest rates are going up and it's market forces that are doing it. Market forces are very powerful.
"With the [stock] market weak, I don't think they will act," Metz added.
He sees the yield on the 30-year US Treasury bond closer to 6.75 percent, instead of 6.00 percent, at year end.
Friday, the long bond's yield hit 6.15 percent, its highest level since Aug. 12. And where does Metz see the Dow at Dec. 31?
"Considerably lower," is all he would say.
First Albany's Johnson said he's sticking to his target of 10,200 for year end -- the same target he picked at the start of 1999 -- "and look, we're about there now. We could go below that and then come back up."
The stock market, in Metz's view, is "in the middle stages of a decline. One, interest rates are going up, regardless of what the Fed does. We've had a hint from one of the economists at the European Central Bank that he was concerned about inflationary pressure. In fact, rates in Europe are up 140 to 150 basis points since the beginning of the year without any central bank action.
Crude oil prices shot above US$25 a barrel this week, the highest in two-and-a-half years, and more than double their level at the start of 1999. Nickel, copper and aluminum prices have gone up as well.
Johnson pointed out that those investors who are still buying more stocks are buying "electric utilities, drugs, the things you buy when you're worried sick" about the economic outlook.
Metz said stock investors could cushion themselves against the pain of rising rates by cutting their holdings in equities somewhat and putting some of that cash in two-year and five-year US Treasury notes.
"It's going to be a rocky road for the next few months," Metz said. "I'm just crossing my fingers and hoping we've seen the worst of the decline" in stocks, Johnson said.
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