over inflation. For one, wages are growing at a substantially more rapid rate than the overall consumer price index. Inflation has remained at a tame annual rate of less than 2% so far this year because commodity prices have been especially weak. Some, like oil, in particular, have actually declined significantly. But, outside of commodity prices, inflation seems to be growing at a considerably more rapid rate than the numbers are telling us. On top of that, it’s entirely possible that oil prices have hit or are close to a bottom, and I mean a very long-term bottom.
A combination of wage increases and commodity price increases could begin to turn the tide. I think at year-end we could find that the inflation numbers are not quite as good as they have been and that the Federal Reserve might begin to behave in just a bit more aggressive fashion.
BIG COMPANIES LEAD THE MARKET
By most measures, the first half of the year was extraordinary for the stock market. The S&P 500 was up almost 14% in the first quarter of 1998 alone. That compares to an average yearly gain of at least 9% since 1926. The reason: big safe names, the largest corporations around, attracted investors who thought overseas markets might be in peril.
ROACH: For the first quarter, the stock market, or equity market, as we call it, ignored the Asian contagion. It rose on a euphoria based in part on lower oil prices, lower commodity prices, that helped keep profits going, and full employment that aided consumer demand.
A lot of overseas money helped propel the stock market as well. A strong dollar prompted very significant buying by foreigners the first six months of the year because our economy is very stable relative to the rest of the world, and particularly Asia,
During the first six months of the year, investors have gravitated to large companies with track records of consistent earnings growth. Large-cap stocks–a.k.a. the big corporations–have seen their stocks rise and rise. Meanwhile, smaller- and mid-cap companies look like bargains. The P/E ratios of the companies that make up the S&P 500, in fact, have risen as hig
h as 28 times earnings, which are record levels, historically. Nevertheless, we’ve seen what’s called a flight to quality, where investors flock to big, high-quality companies.
DAWNA EDWARDS: Currently, the economic environment is very favorable for the market. Interest rates are low, wages haven’t risen too much, consumer sentiment is up, people feel good about the economy and so they’re out there spending. At the same time, cash keeps flowing into the equity or stock markets because of 401(k)s and individual investors’ interest in mutual funds.
While the bull market has remained intact, high valuation levels and the uncertainties in Asia have caused investors to seek quality. Because of this, investors have focused on large-cap, blue-chip issues. People are looking to invest their money where they can feel comfortable, sleep at night and get good returns.
ELEY: I want to just put in a bit of