Lacklustre fourth quarter expected

The post Labor Day rally in US equities failed to materialise. Markets remained volatile and lacking direction with the Nasdaq Composite suffering heavier losses than any other established index.

Conditions remain reasonable for a fourth quarter rally but it is becoming a less exciting prospect as each day goes by and any gains are likely to be deferred until the last two months of the year.

The vague hope that the Fed might be ready to start easing back on interest rates was knocked sharply on the head earlier this month. Alan Greenspan seemed to imply the authorities were more than a little worried that high fuel prices might seep through into inflation.

It is possible to construe the Fed position as indicative of the belief that the current oil price is delaying a move to a neutral interest rate position rather than signaling a possible rise.

It is as well to bear in mind that October tends to be a poor month for corporate statements and markets.

Overall the soft landing is now more assured though still not guaranteed. Consumer demand overall is still holding up and the labour market and labour costs are not an impediment to continued growth. These should balance out the shrinking demand for PCs and components.

Years of steadily improving productivity continue to impact corporate earnings and there is a better than fair chance that year 2000 earnings will grow at above at around 15%. The outlook for next year's earnings is already dimmed by the reduction in economic growth and the possibility that productivity gains may begin to taper off.

As things stand earnings growth of 10% in 2001 would have to be seen as top of the range. Any earnings warnings will no longer be confined to the old economy sector but are likely to come from some of the new economy stocks as well.

The shakeout on Nasdaq since the middle of March is no longer looking a simple short-term correction. Its volatility in the 3,600 to 4,200 range looked to be providing good buying opportunities but since it has dipped below 3,500 it raises a few questions about investor comfort with tech stocks. Having adjusted to the idea of discriminating between tech stocks investors seem now to be discriminating against them. A psychological reaction to the concept of the techno-economy is, fortunately, a mere possibility at the moment.

Nasdaq could recover as quickly as it has dipped, and probably will once the current valuations on software stocks with strong market positions are appreciated.

The traditional indices are biased to the upside though still in need of a catalyst to spark a sustained upwards move. We would expect the S&P to be upwards of 6% higher by the year-end.

Jackie Bowie is a fund manager with Murray Americas Growth

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