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New York Market: Shares can survive a rate rise

ENOUGH of the inflation hysteria. Rate increase or not, the stock market is poised for further gains this year. At least that's the view of some money managers, who argue that a boost in short-term rates from the Federal Reserve, whether at its 30 June meeting or later, is already priced into stocks and bonds.

"Business is great," said Uri Landesman, a money manager at Aaron Fleck & Associates. "I'm feeling better about the market than I've felt in a while. I'm finding things to buy. I wish I had more cash."

Mr Landesman has been buying America Online. Its stock has lost about 30 per cent of its value in two months. He's also bought a stake in CMGI, an internet investment company whose shares are down 40 per cent from their high in April.

Internet shares aren't the only ones under pressure. Since the end of January, the Standard & Poor's 500 has eked out a 4 per cent gain while the Nasdaq has fallen 1 per cent. Meanwhile, corporate profit growth has surpassed expectations. This "trading range" continued last week as the S&P 500 gained 2 per cent and the Nasdaq 0.3 per cent. The Dow Jones, up nearly 18 per cent this year, led by economically sensitive shares, gained 2.2 per cent.

These concerns have weighed on the market for most of the year, particularly since early April when the yield on the 30-year Treasury bond stood at 5.4 per cent. It is nearly 6 per cent today, close to a one-year high.

Rate concerns have picked up in recent weeks. The Fed hinted on 18 May that it might raise rates for the first time in more than two years. If it doesn't move at its next meeting, investors will be pleasantly surprised, said Bob Streed, a money manager with Northern Trust. If the Fed does raise rates, he said, "that's what people were expecting, so you'll get a sigh-of-relief rally.

"You still have good economic growth and a long-term decline in interest rates and inflation," he continued. Since 1981, the yield on the 30-year bond has gradually declined from 15 per cent as the Fed fought inflation left over from the 1970s.

Historically, stocks have gained even after Fed funds increases. After two Fed funds increases, the S&P 500 has on average rallied 4.5 per cent over the following 252 days.

Alan Skrainka, market strategist at brokerage Edward Jones, said: "A Fed rate increase is not the end of the world."