The US stock market has remained highly volatile over the past few months and there are now clear si...
The US stock market has remained highly volatile over the past few months and there are now clear signs of a slowdown in economic activity in the US. With signs of a slowdown in economic activity, we may have seen the last rate increase of this cycle. If so, this would be rather bullish for equities. Demographic trends and savings also remain supportive to the stock market.
Against this broadly supportive background to equities we have a number of short-term negative factors that have undermined confidence. The combination of a slowing domestic economy, a weak euro and high energy prices has started to affect corporate profit growth.
The current account deficit also remains a worry to the Federal Reserve. Foreign investors are helping to fund US consumption and if the US dollar and stock market start to weaken foreign inflows might slow forcing the Fed to raise rates.
Within our smaller company portfolios we are focusing on some new areas. Biotechnology has emerged in the last six months to take up where the internet stocks left off. Investor excitement about the mapping of the human genome has catapulted several biotechnology stocks to extreme ratings.
Identifying which biotech company will discover the next blockbuster drug is difficult and we have instead identified companies that will provide research equipment and services to the biotechnology companies. There is less risk investing in companies that supply to research companies than by investing directly into the drug development companies themselves.
Concerns about earnings have been particularly damaging to the technology sector and has left several internet companies struggling for survival. Other sub sectors like optics, internet software, and telecommunication equipment have all enjoyed periods of strong stock price performance, but now the list of technology stocks still enjoying rapid price appreciation has shortened and the market appears to be returning to valuing companies based on earnings and cash flow grow. This is not before time as far as we are concerned.
We remain heavily exposed to the oil field service companies and to a few special situations within the exploration sector. Although we expect the oil price to retreat over the coming months the demand for oil field services is only just beginning to recover after the collapse in 1998. We would expect this cycle to stretch out until 2002 and expect the stocks to out perform for some time.
The outlook for the market is as always difficult to predict, but with economic growth slowing and inflationary pressures still muted, the flow of funds into the stock market should ensure that the overall market makes reasonable progress over the next year. Although we will not see a particularly good return in 2000 within the broad market, there are many opportunities in US smaller companies.
Graeme Glen is US Smaller Companies manager at F&C
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