Early May was gloom and doom as usual on the equity market. The FOMC voted to raise both the Fed Fu...
Early May was gloom and doom as usual on the equity market.
The FOMC voted to raise both the Fed Funds and Discount rates by 50 basis points to 6.50% and 6.00% respectively. The decisive move by the Fed was expected but the accompanying policy statement left investors far from certain about the outcome of the June FOMC meeting.
The Committee noted "the risks are weighted mainly towards conditions that may generate heightened inflation pressures in the foreseeable future." Consequently, stock market volatility continued particularly among technology stocks. Towards the end of the month, selling pressures eased with the release of economic data showing signs of moderating economic growth.
Margin debt fell nearly 10% in April to $251.7bn, the first drop since August 1999 and investors withdrew $7.11bn from mutual funds on the Friday and Tuesday surrounding the Memorial Day holiday. This, however, could be short lived if the market rebound continues during June.
Recent economic data released indicates the US economy is at last slowing. Durable goods orders suggests, although volatile, the pace of manufacturing growth is moderating. This was further backed up with the Chicago Purchasing Manager's index, which fell to its lowest level since February 1999. Inflation reports have also been benign.
The April Consumer Price Inflation report was in line with expectations as overall consumer prices were unchanged and the core CPI rose 0.2%. Similarly, the core Producer Prices Index rose 0.1% and the overall finished goods PPI fell 0.3% on a 4.1% decline in energy prices. Consumer confidence was surprisingly strong, rising to 144.4 from an upwardly revised 137.7 in April.
Nevertheless, consumer spending has begun at a slower pace in the second quarter, with a 4% growth rate.
Alan Greenspan would have been mindful of the continuing employment strength in the run up to the May FOMC meeting. The unemployment rate fell to 3.9%, a temporary 30-year low.
Merger and acquisition highlights included Spain's Terra Networks' $12.5bn bid for Lycos, Cisco Systems' $5.7bn bid for Arrow Point, IP won its bid battle for Champion, Merck and Schering Plough formed an alliance and Unilever made an $18.4bn bid for Bestfoods.
Activity in the month extended to a new sector with the announcement that UAL is to buy US Airways.
In the financial information sector, Thomson's surprise cash bid for Primark throws down the gauntlet to Reuters, Dow Jones and Bloomberg and suggests M&A activity lives on.
Otherwise, oil strength, euro weakness and the Microsoft antitrust battle continues and the market remains volatile and difficult to read.
Tim Chesterfield is a US Fund Manager, Pavilion Asset Management
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From 6 April 2019