New York Market: Fed hints at `modest action' on rates

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The Independent Online
ALAN GREENSPAN ended the suspense on interest rates. Now investors can turn their attention to corporate earnings, and the outlook bodes well for further gains in stocks. The Federal Reserve chairman suggested on Thursday that the central bank will take only "modest" action to keep inflation from derailing the economy. Investors took that to mean one, or at most two, increases in short-term interest rates of a quarter percentage point each.

That's an easy pill to swallow because market interest rates have already risen to reflect that likelihood. Mr Greenspan's comments pointed to growth with just a hint of inflation. That's a recipe for rising profits at industrial companies, which benefit from economic expansion and have lagged behind the rest of the market until the past few months.

"If they come in and raise rates by a quarter point, it's telling us the economy's strong, the world is healthy, and that's good for the value stocks," said Frank Korth, head of growth-stock investing for National City Investment Management.

The Standard & Poor's 500 gained 3.8 per cent for the week, while the Dow Jones Industrial Average rose 3.5 per cent. The Nasdaq jumped 4.7 per cent.

Once money managers became convinced the Fed won't let inflation surge, the yield on the 30-year Treasury bond fell to 5.97 per cent having earlier surged to 6.2 per cent as investors fretted about potential increases in wages and prices. "The stock market has to feel good about [the Fed's vigilance]," said Richard Sichel, chief investment officer of the Philadelphia Trust. "It takes that cloud away, and now we can focus on earnings."

Investors this week get their first taste of second-quarter profits. Three big investment banks report this week - Lehman Brothers, Goldman Sachs and Morgan Stanley Dean Witter.

Analysts are forecasting that operating profits rose by 12.4 per cent in the quarter. The third quarter should be even better, with 22.1 per cent growth expected. Basic-materials companies should post especially strong growth because their results were so poor last year.

However, investors will have to put up with some bad news first. Last week, Compaq Computer said it will lose money this quarter rather than earn it as investors expected, while Gillette said its profit will be less than forecast.

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