New York market: Growth surge will have its downside

INVESTORS who thought slowing profit growth would do in the bull market in US stocks now have rising interest rates to worry about. The economy's growing faster than expected, cranking out new jobs, boosting wages and - helped along by the surge in stocks - fuelling consumer spending.

That's great news for the profit outlook, although it means the Federal Reserve is more likely to raise interest rates to head off inflation. Interest rates as measured by the yield on the 30-year Treasury bond slumped from 7.88 per cent at the end of 1994 to a low of 4.84 per cent on 2 October, 1998, and may not get that low again for a long time.

"We don't think rates are going to go a lot lower from here, so you do lose what has been an extremely important part of the bull market," said John Bartlett, fund manager for Commerce Funds.

That means investors should buy companies that do well in a growing economy, such as building-products maker Georgia-Pacific Group, Bethlehem Steel and chemical producer Union Carbide, said Anthony Dwyer, market strategist at Ladenburg Thalmann. Mr Bartlett's firm is buying small and medium-sized companies, which are cheaper than many big companies and not as risky, because they've lagged in the rally of the past four years.

Government reports showing a stronger than expected economy hit the market like a one-two punch last week. The Standard & Poor's 500 Index lost 3.1 per cent for the week and the Nasdaq plunged 5.3 per cent - the biggest drop in four months for both. The Dow Jones Industrial Average, which includes many economically sensitive companies, held up better, falling 0.6 per cent.

Investors snapped up metal, oil, chemical, paper, aluminum and aerospace stocks, all of which benefit from a growing economy. Computer companies and telecoms equipment makers posted the biggest drops. Microsoft lost 8.6 per cent, EMC sank 15 per cent, and Lucent dropped 11 per cent.

Some investors thought they would see interest rates drop this year because Asia, Russia and Latin America slumped in 1998. The consensus was that the slowdown would spill over to the US, prompting the Fed to follow up on its three 1998 rate cuts. That consensus is gone. "There's a recovery developing in Asia that is going to make our economy even stronger," said Mr Dwyer, who expects a 15 per cent drop in the Nasdaq composite in the next two months.

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