International Markets: New York: A case of the holiday blues

Lingering concern about the outlook for 1998 corporate profits, and an abbreviated week of trading because of Christmas, will send US stocks lower this week. The decline probably won't be too severe, as the lowest interest rates in four years will keep demand for equities steady.

Such companies as footwear giant Nike and investment bank JP Morgan disappointed investors last week by reporting weak earnings or warning that profits would fall short of estimates. Both companies cited adverse conditions in Asia for the shortfall.

The first sign that turmoil in Asian economies would be more than a blip on the radar screen for the US stock market came in late October, when the Dow Jones Industrial Average took a one-day 554-point tumble. Last week markets in Japan and Hong Kong slumped again on fears of more bankruptcies.

The volatility caused by weakness in Asia may be heightened this week by a dearth of trading activity. In the past three years, the volume of shares traded on the New York exchange during Christmas week has been 30 per cent below its yearly average.

The Dow industrials fell 82.01 points, or 1 per cent, to 7,756.29 last week. The Standard & Poor's 500 fell 0.7 per cent. The two worst-performing stocks in the S&P 500 this month are Cabletron Systems and Oracle, down 40 per cent and 33 per cent respectively.

The US stock market may be the victim of its own success. Share prices have more than doubled in the last three years, probably reflecting all the good news to come.

"The market can't afford any disappointments," said Jeff Petherick, a money manager in Loomis Sayles. "But what usually undoes the US stock market is rising interest rates, and we're not seeing that right now."

The yield on the benchmark 30-year Treasury bond fell as low as 5.86 per cent on Friday, down from 6.64 per cent when the year began.

The slide in yields came after the Federal Reserve declined to raise the federal funds rate from its current 5.5 per cent at a meeting on Tuesday. Bonds were also helped by tumbling world stock markets.

"The economic slowdown in Asia will help relieve inflationary pressures so that the Fed won't raise interest rates in 1998," said Art Bonnel, manager of the $100m Bonnel Growth Fund. "In fact, it's more likely we'll see a decrease in rates next year."

The US stock market tends to get a case of earnings jitters at this time every quarter, so investors shouldn't attach too much importance to the market's recent woes, said Jack Shaughnessy, president of Boston Security Counsellors.

It is, after all, the holiday season.

Copyright: IOS & Bloomberg