Rate hikes, stock market debated at Money Show

David Strow

Tuesday, May 16, 2000 | 10:51 a.m.

Today's expected interest rate hike by the Federal Reserve shouldn't rattle the stock market, experts said at a Las Vegas investment conference.

The Fed was expected to announce the hike this afternoon, after the Sun's printing deadline. Details will be available this afternoon on the Sun's website lasvegassun.com

Market commentators and analysts, speaking Monday at the Las Vegas Money Show, didn't expect the hike to have a major impact on the stock market, since a hike of 0.5 percentage points was widely expected on Wall Street.

The annual show organized by InterShow of Sarasota, Fla., drew 10,000 people this year to hear investment advice.

Fed watcher Joseph Battipaglia, chairman of investment policy for Gruntal & Co., was a dissident in predicting the Fed would take a more cautious approach, tapping the economic brakes with a 0.25 percentage point rate hike.

"(Rate hikes) are starting to have an effect on the economy ... it's the right move," Battipaglia said. "If I'm right about this, the stock market will take this in stride.

"It is my judgment that this is the last increase we'll see."

But Chicago fund manager Elaine Garzarelli, chair of Garzarelli Investment Management, predicted a 0.5 percentage point rate hike, with more hikes possibly following.

"Fifty basis points ... is what most people believe is likely, and (Chairman Alan) Greenspan doesn't like to shock the market," Garzarelli said.

The Fed's Open Market Committee will decide if interest rates should be hiked for the sixth time in a year. The committee sets the interest rate that banks charge each other for overnight loans, which in turn is used to set key interest rates for lending, such as prime rates. By raising interest rates, the Fed attempts to slow economic growth -- a move designed to control inflation.

The previous five hikes have all been increases of 0.25 percentage points. The last increase came March 21, when the Fed hiked its rate to 6 percent. Banks quickly followed suit, raising the prime rate to 9 percent.

Battipaglia argued an aggressive rate hike was less likely because the economy's torrid growth is starting to moderate, making it more likely that the Fed would continue to slowly bump interest rates upward a quarter-point at a time as needed.

But Garzarelli said she expects a more substantial hike this time because growth remains strong, with rates running between 5.5 percent and 7 percent on an annualized basis.

"After (an increase today), they'll keep tightening until (the growth rate gets to) 3.5 percent to 4 percent," Garzarelli said. Generally, a growth rate of that level is considered non-inflationary.

Garzarelli's prediction was echoed by Frank Cappiello, chairman of Cappiello-Rushmore Mutual Funds.

The Fed, Cappiello said, has been "running behind the curve" in keeping up with growth, and won't miss its opportunity to take an aggressive step against inflation.

"After this, they'll have less flexibility (to raise rates) because of the political season," Cappiello said. A second hike could follow by July, Cappiello said.

Paul Matthews, a San Francisco international fund manager, said international investors want the United States to take strong measures to ensure the strength of the dollar.

"They're looking for 50 basis points, and they'll be disappointed if they don't get it," Matthews said. If the Fed didn't deliver, Matthews said a sell-off by foreign investors in overseas markets is possible, with some selling activity on the U.S. markets.

Garzarelli, in contrast with other speakers, took a decidedly bearish view of the stock market in the short term. Despite a 40 percent plunge in the Nasdaq and 8 percent fall in the Dow Jones Industrial Average from their highs earlier this year, Garzarelli said the market correction could run another six to 12 more months.

Part of the reason, she said, is that technology stocks remain overvalued.

"Right now, (the correction) is because the new economy stocks are down," Garzarelli said. "We will continue to see corrections there."

The flip side of this, Garzarelli said, is that so-called "old economy" stocks are attractively valued. Garzarelli said attractive sectors include the food sector, tobacco, oil, natural gas and beverages -- though she added technology stocks remain a smart long-term investment.

"There's excellent, excellent values that we haven't seen before," she said.

Stocks should also start to move upward toward year-end because of the presidential election season, which historically moves stocks upward.

But Battipaglia took a far more bullish view, predicting a huge comeback for the Nasdaq. He said investors should continue to back technology and telecommunications stocks, calling these "the ultimate global consumables."

Battipaglia predicted the Nasdaq would finish the year at 5,500, an increase of more than 50 percent over current levels. The Dow, Battipaglia said, would finish at 12,500, a 16 percent increase over current levels.

"I wouldn't be surprised by Nasdaq 6,000," Battipaglia said without hesitation, drawing applause from the audience.

However, Battipaglia cautioned that stocks will be driven by actual profit growth over the coming months, rather than anticipated growth rates. This will make smart stock selection even more important, he said.

"The active (mutual fund) managers will really be able to show their stuff and give big returns to their investors," Battipaglia said.

Battipaglia suggested a portfolio made up of 40 percent technology stocks and 20 percent biotechnology stocks. The balance, he said, should come from the financial services and consumer goods sectors.

Battipaglia's bullish outlook was echoed by market commentator Louis Rukeyser, who moderated the panel. Rukeyser blasted market pessimists as "charlatans" and "fright merchants."

"Right now is a splendid opportunity to buy if you can, and to hold if you can't," Rukeyser said. "Despite the scary headlines lately, we're not finished yet. When (the correction) is over, we'll still have a long, long way to go in upside."

David Strow

is a business and gaming writer for the Sun. He can be reached at (702) 259-4069 or by e-mail at strow@lasvegassun.com.