Dim Forecast for Stocks
Even after ending the last trading week with small gains, US stocks were still low, closing at 9,825 for the Dow Jones and 1,757 for the NASDAQ (technology stocks index).
Since the beginning of this year, the NASDAQ has shed ten percent of its value and reverted to its September 2003 low. Attempting to predict whether bottom has been touched would be like catching a falling knife – you’d be cut before you smiled.
The continuing plunge of US equities, echoed by most equities around the world, has many causes:
1. Record oil prices. They are racing toward $47 per barrel, fueled by uncertainties over oil supplies from strife-torn Iraq and restive Venezuela, one of America’s biggest oil suppliers. Controversial president Hugo Chavez won a 16-point lead in the national referendum of Monday, August 16, but this result could go either way – stabilize the industry or the reverse, depending on how the opposition reacts. Clearly, high oil prices set up inflationary pressures in the United States and around the world. They also push up interest rates which tends to reduce equity attractiveness.
Economists calculate that energy prices above $40 the barrel could slow growth in America by 0.7% a year.
2. Higher interest rates. Last week, the Federal Reserve raised rates by 0.25 % on top of the June 0.25% hike to 1.5% for federal funds. This rate is still low, but Chairman Alan Greenspan of the American Federal Reserve spoke of interest rates continuing to rise at a measured pace. In fact, the American bond market is already pricing hikes at the 2.5% yearly level for the next 6 months. When interest is high, investors are less interested in stocks. It may be argued that in the mid-1990s, stock markets rallied despite climbing interest rates. But then, America enjoyed a period of growth combined with high productivity and a burgeoning hi-tech industry. None of these factors exist at present.
3. Disappointing economic figures. America’s trade deficit for June stood at a new all time high of $55.8bn. This was substantially more than the analysts’ consensual forecast of $47.7 bn.
The most worrying factor was the 4.3% slump in American exports on top of the rise in imports. Financing this huge deficit poses hard questions, particularly when it is accompanied by falling US equities.
An annual $550 bn trade deficit may contribute to the continuing weakness of the American dollar, upset American economic stability and hit the world economy. Growth predictions for the third quarter have slowed to 3.8% of the GDP from the previous more optimist estimate of 4.5%.Prospects for the near future are further dimmed by the disappointing June employment report of 32,000 new jobs compared with the 200,000 predicted, and the negative revisions of the May report.
4. Signs of slowdown in China and Japan. China’s soaring economy in recent years has acted as a global engine, attracted outside investments and created huge demands in many sectors. Its impact was universal, responsible also for the rally in commodities prices (like metals) and even the mounting maritime freight rates. But Beijing’s economic leaders have now applied the brakes to rapid growth and expanding credits in favor of a sustainable long-term pace of growth, with the effect of curbing the economy and demand.
Japan’s economy continued to expand but at a slower pace than expected. Partly dragged down by huge bank debts dating from the mid-1980s and weakened spending level, Japans’ gross domestic product grew by only 1.7% compared with the 4.4% forecast. The Japanese economy is one of the most vulnerable to rising energy costs as it is entirely dependent on imports.
The Nikkei 225 (index of 225 leading stocks in Japan) plummeted 10% from its end-of-June high as foreign investors raced to exit the Japanese stock markets
5. Fears of “another bubble”. The rally in American stock-markets in the last one-and-a-half years – and especially in the technology stocks (The NASDAQ composite index, gained from the March 2003 low of 1,300 to the yearly high of 2,150 points in February 2004.) was succeeded by surges running into hundreds of percentage points for the stock of some hi-tech companies. This trend which netted certain companies fabulous profits reminded many seasoned players of the 1999-2000 leap that ended in the 2002-2002 meltdown of those stocks.
In this regard, the public auction of Google search-engine powerhouse’s initial $3.3 bn public offering of 25.7 million shares has been criticized as too high. However, a favorable response to the offering in its early days could provide good momentum for lifting all the technology stocks.
6. Jitters over terror threats hanging over the United States in the period leading up to the presidential election in November have kept many investors in the waiting positions characteristic of periods of high fluctuations.
The TA25 (index of 25 highest market value shares in the Tel Aviv stock market) climbed consistently from the second half of 2003 up until the record high of 565 points at the start of July 2004. In Israel, modest losses in July, found temporary support in the important 440-445 level. The lead player on the Israeli market is the hugely successful and popular Teva generic pharmaceuticals. The precipitous 20% downturn of its stock in recent weeks (from $32 to annual $25 last week) weighed heavily on the local market on top of the high volume of public redemptions of stock from mutual funds. In the last trading week, TA25 finished at 513 points, slightly above the 510 points support level. The Israeli stock market might find temporary relief this week from government approval of the 2005 State Budget of NIS266.9 bn ($60 bn), although it sparked trade union announcements of general strikes from September 1. But the Tel Aviv stock exchange’s direction in the near future is south; so long as technical corrections in the coming weeks stay below 540-545 level in TA25, the Israeli market will continue its downward trend.
What can we expect from markets in the near future?
In the medium to long term, there is hope. The US presidential election in November will reduce some of the uncertainty preying on world markets and may even relieve some of the terrorist fears leading up to that date.
More immediately, September and October are traditionally slow months on American markets, especially in stocks. Big losses in equities often accrue during these months. At the technical analysis level, the picture remains gloomy: as long as stocks dip, we are left with the possible NASDAQ price target of 1,600 points for the future. Only a break into the 1850-1900 levels and above can pull out the NASDAQ index out of the trough in which it has been floundering since April 2004.
After the US election, a new economic program would have to be set in motion by whoever occupies the White House, for the US stock market to turn around early next year.