Bell Financial Management Corporation

Investors continued to remain nervous throughout July as almost every stock market rally was followed by a subsequent sell-off. Most major stock market indexes remained range-bound during July as investors sorted out the economic news released trying to get a pulse on the state of the U.S. economy.

The Federal Reserve (Fed) continued its rhetoric in July underscoring its posture as being concerned that the U.S. economies’ continued robust growth, could presage the rekindling of inflation.

The Fed met on June 28th and left short-term interest rates unchanged, after raising interest rates six times since June of 1999.

The Fed is trying to slow the U.S. economy into a “soft landing” to slow the rate of growth that the U.S. economy has exhibited in the past decade.

Many of the economic reports released throughout July depicted a slowing in the real estate sector. In addition, most economic indicators released in July continued to depict the U.S. economy growing with little inflation in the pipeline.

July was also a month for the release of corporate earnings for the second quarter. Most bellwether companies reported satisfactory earnings for the second quarter. Investors however, still gun shy from the precipitous decline of the stock market in mid April, punished many companies that did not have exceptional earnings growth, by selling off their stocks with a vengeance.

Many internet stocks fell precipitously in July as investors decided that a company making a profit was important again. Many internet stocks have declined 75% or more from their peak set in 1999. Many of these companies will not exist in the future as their need for aggressive amounts of capital will not be met by investors at this time. It is healthy for this to happen, as ultimately if a company does not have a viable business, it should not exist. In addition, when the internet landscape is purged of the companies that have been wasting the precious capital that investors have bestowed upon them, then the remaining sound internet companies can again regain their access to the capital that they need to grow and prosper.

August was a great month for the stock market. However, investors continued to dissect every bit of economic news to try to get a clue as to what direction the U.S. economy was taking, with the most emphasis on what was happening on the inflation front.

The cause for investors’ concern throughout August remained with the posture of the Federal Reserve (Fed) at their meeting on August 22. When the Fed did meet they opted to stay on hold and leave short-term interest rates unchanged. The stock market lost some of its steam in the last week of August right after the Fed meeting, as most major indexes were range-bound, albeit, moving into positive territory for 2000 . The cause was most likely the lackluster trading volume that presages the end of the summer vacation season and specifically the Labor Day weekend.

Investors remained nervous throughout September, even though the economic statistics being released depicted a slowing economy with rising productivity and little, if any, inflation building for the foreseeable future.

September was brutal on some of the bellwether old and new economy stocks. Companies like Eastman Kodak and Intel saw their stocks plummet more than 20% after news was released that their revenue growth was slowing.

Investors had more ammunition to be nervous about in September, with crude oil prices at a ten year high, nearing forty dollars a barrel and the Euro on a free fall, hitting a twenty month low.

In addition, the price of gasoline averaging more than four dollars a gallon in Europe, fueled massive strikes and the shut-down of many major highways.

Protesters wanted the high government taxes that are levied on gasoline to be lowered. However, protesters gained little ground in their quest to lower gasoline taxes.

Investors in the U.S. are concerned that if the economic growth in Europe slows down due to escalating crude oil prices, that it will hurt U.S. companies ability to export goods and services abroad. This would not bode well for many of our multi-national corporations.

The bond market remained relatively stable throughout September, as it has for most of the year. Most bond classes continued to out-perform the stock market. Long term bond yields for government bonds stayed below 6%.

The Dow-Jones Utilities Average hit new records as the rest of the stock market sank and remained in negative territory.

Utilities generally do well in an environment of dropping or stable interest rates, as has been the case so far in 2000. In addition, investors have flocked to utilities this year as a safe haven from the turmoil of the high technology implosion.

Energy stocks also did quite well throughout the year and continued to out-perform most other sectors during the third quarter. The price of crude oil escalating certainly was a factor bolstering energy stock prices.

September ended with most major stock market indexes on the down-side. Investors continued to remain wary as many companies released pre-announcements of poor earnings and revenue performance for the third quarter.

In addition, crude oil prices remained over thirty dollars per barrel at the close of September, even though President Clinton pledged to sell thirty million barrels on the open market to help increase its supply.

Perhaps if the Fed remains on hold at its next meeting on October 3, and the earnings news that is released throughout October is favorable, then the stock market may find some support.

If in fact the Fed does succeed in orchestrating a “soft landing” for the U.S. economy is anyone's guess. However, most of their attempts in the past to slow the economy has resulted in triggering a recession, which would not bode well for the stock market.

I will continue to maintain a defensive posture in the management of my clients’ accounts. To achieve this goal I will be reducing biotechnology and technology holdings, and increase the weightings of cash, short-term bonds, health care, energy and the utility sectors.