Bell Financial Management Corporation

The stock market continued its rise at the beginning of the second quarter. The Dow Jones Industrial Average (DJIA) peaked on May 14 closing above 11,000. The Standard and Poors 500 (SP-500) and the NASDAQ Composite Index (NASDAQ) both peaked in late April. Both indexes lost ground in early May as the DJIA left them in the dust.

Alan Greenspan, the Chairman of the Federal Reserve Board spoke at the Chicago Federal Reserve conference on May 6. He warned that "inflationary pressures could re-emerge, possibly faster than the financial markets currently perceive". "At some point" Greenspan said, "labor market conditions can become so tight that a rise in nominal-wages will start increasingly outpacing the gains in labor productivity, and prices inevitably will begin to accelerate."

Mr. Greenspan was once again warning the financial markets that the Fed was concerned about inflationary pressures building in the economy.

The bond market is always gun shy of the mere mention of inflation. Therefore, the benchmark 30 year bond fell 1 2/32 points or $10.625 for each $1,000 face amount, sending its yield (which moves in the opposite direction of its price) to 5.873% on May 6, the day that Mr. Greenspan warned that inflationary pressures might be building in the economy.

The stock market however, ignored this speech . The DJIA lost some ground, but both the SP-500 and NASDAQ finished that day with some small gains.

Perhaps the stock market is getting immune to the "jaw boning" that Mr. Greenspan seems to enjoy.

In mid June, the Consumer Price Index (CPI) was released. It was unchanged for the month of May, reinforcing the concept that the mantra of the Federal Reserve Board may have been misplaced.

The financial markets got another scare when Treasury Secretary Robert Rubin announced in mid May that he would resign on July 4, of this year. Mr. Rubin had originally worked on Wall Street and the financial markets were comfortable with his position as Treasury Secretary. They felt he had an intimate understanding of the workings of Wall Street.

Mr. Lawrence Summers, the Deputy Secretary of the Treasury was nominated to Mr. Rubin’s post.

Mr. Summers is basically a Washington bureaucrat and his acceptance to Wall Street is tentative at best.

Summers is and advocate of privatization of Social Security, and has been in favor of taxing security transactions. Both of these issues are at best controversial.

Rubin’s announced resignation preempted a broad base decline in the stock and bond markets starting in mid May and continuing until the end of May.

The overall stock market traded in a narrow range during the first two weeks of June.

The bond market however, lost ground in early June. The yield of the 30 year Treasury Bond rose to above 6% on June 9. The last time it reached that level was in May of 1998.

I suppose the bond market was "spooked" by Mr. Greenspan’s speeches, suggesting that inflation may become a danger in the future. The Feds job is to foresee this event far ahead, and raise short term interest rates to preempt any inflationary forces building up in the economy.

Mr. Greenspan spoke again in mid June, warning congress this time that the "productivity gains" derived from the "computerization" of American corporations could soon hit its limit.

Ironically, the same day, the icon of high technology and the Chairman of the Board of Microsoft Corporation, Bill Gates, who literally is at the forefront of the high tech revolution, said that the productivity gains of high technology hasn’t even begun!

Mr. Gates is worth more than 80 billion dollars and certainly is tuned in to the high technology revolution in America. I think he is on the mark with his prediction of continuing productivity advances well into the next century. Mr. Greenspan shame on you!

On June 30 the Federal Reserve Board did what most Fed watchers predicted, that is to raise the Federal Funds Rate a quarter point to 5%. The Discount rate remained at 4.5% and the Prime Rate went up one quarter percent to arrive at 8%.

The real news in reference to this meeting was that the Fed changed its monetary stance to "neutral". This means that the Fed was sending a message to the financial markets that it was not expecting to have to raise interest rates any time in the near future.

The Fed is planning to meet four more times this year. Their meeting dates are, August 24, October 5, November 16, and December 21.

The financial markets breathed a sigh of relief when the Fed announced its bias was "neutral". All the financial news agencies predicted that this was the first of several interest rate hikes on the horizon. If this were true, then the financial markets would have behaved very negatively.

The Treasury yield curve is now quite healthy as the shorter maturities are yielding less than longer maturities, suggesting that continued economic growth and not a recession is ahead for the US economy.

There has been few pre-announcements in reference to earnings for US corporations at the end of the second quarter. Most likely earning announcements for the second quarter to be released in July should be very favorable, and as such, the stock market should perform well this summer.

In the second quarter the stock market broadened. Value stocks performed better. Health care stocks performed poorly, due to investors being concerned by rhetoric from congress in reference to more Medi-Care controls. Most likely congress will again be grid-locked, therefore, health care stocks should catch up by year end.

The foreign markets have stabilized, but may continue to have a rough ride ahead.