Investors in the US market are facing an uncertain environment of the undecided presidential result,...
Investors in the US market are facing an uncertain environment of the undecided presidential result, an economic slowdown, and concern over the growth of companies.
At this stage, bond markets indicate belief that the Fed leans towards easing interest rates. Economic data continues to provide strong evidence of a slowdown. Additionally, credit markets are facing a rapid evaporation of liquidity, as banks tighten lending standards, and high-yield markets continue to suffer.
The strength of oil prices over the past months has been a major concern, potentially impacting the level of inflation. The corporate newsflow over recent weeks also supports the argument for a slowdown, with earnings warnings continuing to be released.
Investor concern has now moved on to the fact that the economy may turn too quickly in a negative direction, heading towards a hard landing, and the hope is for an easing of rates in early 2001.
Bush winning the election is taken as a positive as he is seen as being friendly to the corporate sector. In addition, his plan to cut taxes is viewed favourably in the light of the economic slowdown.
The pre-releases for sales and earnings predictions for the fourth quarter from the technology companies have hurt the Nasdaq, forcing it towards the 2500 support level. An announcement from Gateway of the weakness in PC demand has hit the performance of all related stocks. Microsoft was hurt further by an analyst downgrade, Intel and other chip companies have suffered from an easing of demand, and Apple predicted a sales slowdown. The growth of the wireless market has come under scrutiny, as investors have questioned the full potential of the third generation markets. Motorola added to the frustration as they guided estimates for sales targets down even further. The telecommunication companies suffer from concern over levels of future capital expenditure and potential problems in raising further capital.
Also the banks have suffered due to concerns over credit quality, despite the potential release of pain through an easing of rates over coming months. Bank of America yet again announced earnings warnings due to higher non-performing loans, causing negative sentiment. The one bright spot within financials has been property and casualty companies outperforming due to the cycle of price increases which appear to be moving at sustainable rates.
Looking forward to the short and medium term, support should stand for defensive sectors and stock selection should be the main strategy in the more volatile, higher growth sectors. At the time of writing, the final court case should be completed to decide the election result. The newsflow on the economy is the crucial issue going towards year-end, and will hopefully support the economic progress towards a soft landing. If this is reached, the true growth companies should outperform the market.
Gareth Powell is an analyst at Framlington
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