The year 2000 started off poorly for the US equity markets as investors were ambushed by a fairly su...
The year 2000 started off poorly for the US equity markets as investors were ambushed by a fairly substantial stock market decline in February, but a sharp rally in March brought the indices back up to new highs. Ultimately, weaker earnings pre-announcements, higher energy prices and Presidential election jitters led to further stock sell-offs and going into the end of the year, the major US equity indexes were decidedly down.
Semiconductors, semiconductor equipment, telecoms, computer hardware and software, internet business-to-business and business-to-consumer, fibre-optics, and any component of broadband technology have been the driving force behind US stock gains over the last several years. But the Federal Reserve's tighter monetary policy in an attempt to engineer a soft landing for the country has played havoc with shares on higher price/earnings multiples. Internet stocks have been destroyed as well as most technology new issues.
On the telecoms front, too much capital has been chasing too few good business plans and wireless telephony faces high competition on a global basis. Companies such as AT&T, Verizon, Deutsche Telecom, British Telecom and many other global giants have spent large sums of money on wireless transmission equipment, wireless telephones and software, and the necessary airwave spectrum at auction. This has put pressure on telecom company balance sheets, indicating possible future slowing of their expansion efforts. Competitive local exchange providers, known as CLECs, have been hurt by their inability to obtain construction financing through corporate bond financing and are now facing difficult choices.
During the summer of 2000, energy and healthcare stocks began to perform better and drilling and oil service companies, such as Smith International, Grant Prideco and Barrett Resources, provided strong returns. Energy exploration efforts by the major US and global oil companies have lagged over the last decade and, as national gas and oil prices remain high, new exploration efforts will be necessary. This is true even if oil prices fall back to the level of $25 a barrel, more than enough for these companies to be very profitable. Natural gas, currently selling in excess of $4 per MCF in the US, is expected to remain strong, especially if there is a colder winter.
Insurance, broker and bank shares have also been performing better, probably because of investors' perception of these stocks as more defensive. Brokerage companies are very much impacted by equity trading volumes and these stocks already carry a take-over premium as part and parcel of the financial services industry consolidation. Bank stocks, on the other hand, depend on loan volume and interest rate spreads, both of which could turn against them in a slowing economy. Loan loss provisions, a standard part of bank operations, would also go higher as the economy slows.
Consumer spending appears to be softening and the stocks of consumer electronics stores such as Best Buy and Circuit City appear to be reflecting this possibility. Other major retailers such as Target, Sears Roebuck and Federated Department Stores are also experiencing softer sales patterns while Walmart continues to be the premier US retailer. Automobile financing deals are increasing, as are cash backs and longer repayment periods, a sure sign of heavier dealer inventories.
So far the unemployment figures remain at record low levels, but there are signs that this will change shortly. The bubble known as dot.coms has finally been pricked with multiple bankruptcy filings appearing daily. Large banks such as Chase Manhattan, BancAmerica and First Union have also announced massive layoffs. This situation is expected to continue in the banking and brokerage industry as consolidation takes further hold. Finally, we will have more redundancies in the telecommunications sector as employees at wireline and wireless companies are downsized in favour of more efficient, cheaper technology.
Where to in the future?
Although the US balance of trade deficit is at very high levels, the unemployment rate continues to be low, which will allow consumers to maintain decent spending levels. Moreover, the apparent lack of an ability to save in US citizens is suspect due to the fact that 410K and other savings plans have never been included in official savings rate figures. Consumer spending, then, although slowing modestly, will probably not drop sharply.
A slower US economy should result in some reduction of the dollar's value relative to the euro and perhaps the Japanese Yen. However, the basic reason for so many high capital inflows into the US will not change, including political stability, a still robust economy (with GDP growth to be 3% in 2001 versus 4% in 2000 - quite respectable), a large budget surplus and the usual entrepreneurial spirit.
US stocks have taken a big hit, mostly in connection to reports of earnings shortfalls and slowing revenue patterns, and declines in Nasdaq and smaller technology companies have been terrible. However, some industries will benefit more than others over the next few years, even with a gridlock in Congress. Here's a list of candidates:
l Healthcare: Strong public demand for hospital and HMO increased reimbursement will help these companies improve margins. Picks in this group are Lifepoint (LPNT), Humana (HUM) and HCA-Healthcare (HCA).
l Energy:Energy prices will stay up longer than previously expected, increasing the need for more exploration and drilling. Picks in this group are Grant Prideco (GRP), and Smith International (SII).
l Electric Power Generation:US electric power generation facilities are quite inadequate for the increased demand and new facilities are very much needed. Picks in this group are Duke Energy (DUK), and AES Corp (AES).
l Technology:Semiconductors and semiconductor equipment will continue to be a
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