Despite interest rate hike, Wall Street approves of stable dollar
The jitters may almost be over. Assurances from both the Federal Reserve's Paul Volcker and Japan's Yasuhiro Nakasone last week calmed the financial markets. To stabilize the dollar, the Fed has tightened credit. And the Bank of Japan plans to push its interest rates lower.
Messrs. Volcker and Nakasone ``have gone a long way toward clearing away the clouds of fear,'' says Monte Gordon, research director at the Dreyfus Group, a mutual fund concern. ``The dollar's free fall has been halted. But we haven't cleared the air completely.''
On Friday, New York banks jacked their prime rate one-quarter point to 8 percent. Bond prices swung wildly throughout last week. But equity investors have apparently regained their confidence. The Dow Jones industrial average chalked up a 45.03-point gain for the week, closing at 2,280.40 on Friday.
``We've restored some degree of confidence,'' says Mr. Gordon. But he notes that Congress is still in a ``pugnacious mode toward trade,'' as evidenced by the Gephardt amendment passed last week. And he is watching this week's Treasury auction for Japanese participation.
But given the currency stabilizing moves and the already wide yield spread between Japanese and United States bonds, many analysts believe the Japanese will once again be big buyers.
Gordon figures the dollar will stabilize around 140 yen and interest rates will hold at current levels. But he thinks the Fed's resolve will be tested by speculators. ``The gyrations are not finished.''
Richard Strong of the Milwaukee-based Strong/Corneliuson Capital Management says he has been ``shellshocked'' by the interest rate and currency changes of the last six weeks. ``I've never seen so much volatility.''
His funds have have raised cash levels to 10 percent and oriented holdings more toward firms with overseas markets - chemicals, papers, and computers - to take advantage of the dollar's drop. As for the bond market: ``We're not buying anything until the dollar stabilizes.''
Raymond Worseck of A.G. Edwards ``would start nibbling at long bonds and utility stocks which have been very depressed. But you may want to wait until after the Treasury refunding.''
Mr. Worseck says current fluctuations in rates and the dollar will eventually be seen as an aberration. The low-inflation, low-growth, low-interest-rate ``trend of the '80's is still in place,'' he says. Fed tightening enhances the prospects for a soft economy. In six months, Worseck believes, rates and inflation drop.
He agrees that based on historical fundamental valuations, stocks are overpriced now. But that won't stop the uptrend. ``Bull markets start out based on fundamentals. But at some point, traditional valuations are left behind and psychology takes over. We're looking at a market now divorcing itself from the economy and fundamentals.''