Capital Markets

Analysts Continue Bearish on Market, Economy

''Equity markets will likely trend lower in the weeks ahead,'' according to one report.
Ed ZwirnJuly 27, 2004

The summertime blues are likely to stay with us awhile, according to analysts.

A Standard & Poor’s statement issued last Thursday, just as U.S. markets were closing in on their fifth consecutive week of decline, said that “equity markets will likely trend lower in the weeks ahead” and recommended that investors lower their exposure to stocks and boost cash positions.

“A deterioration in technical and fundamental factors, in response to second-quarter earnings and uninspiring price action on light volume, will cause markets to trend lower in the near future,” wrote S&P chief investment strategist Sam Stovall. “We feel that the renewed embrace of defensive stocks and the lack of follow-through after Alan Greenspan’s testimony and Microsoft’s favorable change in dividend policy, is an indication of market weakness ahead.”

In the meantime, the continued anemic performance of the stock market is beginning to show its effects in the lowest rungs of the debt ladder.

Christopher Garman, the chief high-yield analyst at Merrill Lynch, reported that “the sliding equity market pushed high-yield bonds around the corner after six consecutive weeks of total return gains.”

Predictably, the worst results were obtained in the lowest-rated issues. Triple-C paper suffered mild net declines driven by the media and utility sectors, Garman reported; single-B returns were “a mixed bag”; and double-B paper saw little action and neared the close of the week slightly above even.

High-yield bond mutual funds reported a $196.6 million inflow during the week ended July 21, according to AMG Data Services. The breadth of flows was marginal, however: only 50 percent of weekly reporting funds registered positive net numbers. The year-to-date cumulative flow totals a negative $7.7 billion (5.6 percent), according to Garman.

Moody’s Investors Service published a similarly bleak economic outlook, forecasting a slowdown extending through the second half of the year. “Uncertainties stemming from the presidential election and the stepped-up regulation of corporate governance have dissuaded corporate America from risk taking,” wrote John Lonski for Moody’s. “Many businesses remain wary of [John Kerry’s] economic platform. More in the way of regulation, litigation, taxation and protectionism implies slower economic growth longer term.”