Interview: Russell Investment Group
>> the s&p 500 higher today, but off 1.1% for the year and dow down 1.4%. ernie ankrim with russell investment group anticipates a turnaround. he joins us from washington. as we kick off the third quarter, why are you still optimistic?
>> my optimism is tempered somewhat by the news we’ve seen today, strength in the economy. i’m expecting that as the fed continues to increase interest rates in the short term, we’ll see some economic slowing with the weight of the oil price increases manifesting themselves somewhat. both of those will combine to allow the fed to see some degree of economic slowing as we get into september, november. at that point, when the fed stops increasing interest rates in the short term, i think the market is ready to take off. of course, it will take at least until november before we have that opportunity.
>> so seeing signs of slowing. we had that fed meeting yesterday. your target for the s&p for year end had been 1300. are you sticking with that?
>> i might have to change. but, i’ll tell you, last year, we went from january through the end of october and the market didn’t do a thing, the indexes almost exactly where they started and we ended the year up 12.5%. i think we could see ourselves in the same spot this time, if, in fact, we see market slowing in october and the market stops at 3.75. , then that possibility exists. if that happens, once we get to that end, i think the market looks at what haven’t been stunning earnings performances the last half of the year. we will see surprises on the upside this time but not strong but good enough in this low interest rate environment to propel the market ahead from 10% to 15% before year end.
>> am i hearing that basically you’ll sit tight with your forecast until the fall?
>> yes. if the economic numbers continue to come in really strong, if we see increasing employment numbers, personal income and spending starts to rise dramatically, i’ll be humble enough to step back from that. but as long as we see mixed indications, obviously optimism has been up but debt continues to be high and there’s slowing down in construction spending, we saw today. mixed bags are ok,,but if it’s consistently strong, i’ll step back.
>> we talk a lot these days about the effect of energy prices on the stock market . what do you think the key themes will be for the third quarter?
>> first, i think, before we get to november, we will see lower rather than higher oil prices. i agree with some of the people that said there is a structural bias built in toward higher oil but i think the slowing of our economy, europe is slowing, asia is slowing. these things will put pressure on oil prices and that will be a positive for the market but negative for oil going into fall.
>> so, energy, then, one of the themes continuing the third quarter in terms of what investors are reacting to?
>> i agree. but i don’t think it’s the big one. i think as we’ve seen this year―comparing last year to this year, we’ve seen oil go from the high 30’s to 60 and not have a substantial impact on slowing the economy. if we go from 60 back toward 50 or high 40’s, it won’t be such a stimulus because the economy takes off. that’s great, i think, for the market . it’s only the market responding to low and slow growth that will allow the fed to step off this continued increase in federal funds and that will be the ticker that causes the market to start recognizing the value in equities.
>> in terms of value in equities, i know, as an investor, you’re thinking that growth will start to outperform value, which is a theme we’re hearing from other investors, as well. what’s the rationale right here?
>> two things. you’ve been documenting it well all day on bloomberg. the first is, nothing goes straight up forever. if you look at the return performance of value versus growth stocks using the russell 1000 value and growth indices as you were doing this morning, the return differential has been astonishingly large, on the order of 14% a year over the last five years. at some point, not only value stocks will go up and second, in a low-growth environment, firms that can generate growing earnings become increasingly attractive and we think that, also, will be a catalyst for this portion of the market to take off.
>> in our last 20 seconds, tell us what kind of advances you expect from the group of growth stocks.
>> i expect growth to be up in the 15% to 17% range and value up in the range between 7 to 8, getting us to 12%, my target.
>> ernie, thanks so much for joining us. ernie ank ram of russell investment group. when we return, it was a banner month for auto sales. general motors led the gains. however, analysts caution that does not necessarily mean business is improving. suzanne o’halloran following the story and joins us.
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Listen Market briefing --- Ellen (slow)
Higher energy price --- June (slow)
Oil prices --- Deirdre (slow)
NYSE --- Deb (fast)
holiday-shortened floor trading session, up 4%, closing at $58.75 a barrel. the rise came after heating oil reached a record on continues concern refiners will not be able to meet demand in peak winter months. traders looking forward to what will happen in november and december. gains, as well, for unleaded gas as well as natural gas. however, for the week, oil still down. in fact, just about 2%. $58.75, the closing price for the week. looking ahead to next week, our survey shows more traders and analysts expect prices to fall than are forecasting a rise. here are the settling numbers -- let’s give attention on the manufacturing report that was released today showing first increase this year. at the same time, consumer confidence increased. we have june grasso following this story. june, certainly, so far, it seems that the economy shows signs of weathering the higher energy prices.
>> absolutely and the growth of the pace of u.s. manufacturing in june for the first time in seven months suggests factories are recovering. the institute for supply management’s index for june came in higher than expected. the factory index rose to 53.8 from 51.4 in may. economists weren’t expecting a change. readings higher than 50 indicate growth.
>> 53 represents an uptick from the prior month, which is a surprise. that’s encouraging because manufacturing is the weak link in the economy and the g.m. incentive program with auto sales is probably one contributor boosting the number.
>> manufacturing remains in an uninterrupted expansion that began in june 2003. orders and production increased last month. consumer confidence rose last month, as well. the university of michigan said today its sentiment index reached a six-month high in june. the index increased to 96 last month, up from a preliminary estimate 94.8 and higher than the reading in may. analyst patrick mckeever says confidence is translating into better sales.
>> it was warmer in june than in april and may. we had a late string but arrived with a―late spring but arrived with a vengeance, warm in many markets and favorable for spending.
>> the data supports the federal reserve’s statement yesterday that, although energy prices have risen firmer, expansion is firm. after the i.s.m.’s index for manufacturing for june rose more than forecast, u.s. treasuries tumbled, making it the worst day for the 10-year note in more than three months, dropping over a point. it was the world’s biggest mover among government debt. the report bolstered speculation the federal reserve is no closer to ending a series of interest rate increases.
>> let’s look, june, what happened on the other side of the yield curve. those prices making dramatic moves, as well. here’s the five-year, the price down 18/32, yield up to 3.72%. as for the two-year, look at the price decline, 6/32, yield up to 3.72%. dramatic moves, as well, in the currency market . the dollar surged to the highest in more than a year against the euro, rising against most major world currencies today. let’s return to the stock market and how the economic reports played out, as well. oil a theme for investors along with the economy. the price gains in oil not deterring equity investors. deirdre bolton followed the action and joins us now.
>> oil’s 4% rebound pushed energy stocks higher. exxon-mobil, chevron, occidental petroleum, all of these made the oil group the best performing in today’s session. conocophilips rising as much as 3% after completing a deal to invest in russia’s lukoil. some money managers say the energy stocks are attractive in the long term, but the short-term view shows some facing tough earnings comparisons.
>> the earnings growth rate of the energy companies aren’t sustainable because they did have high energy prices starting in the third quarter of last year. the comparisons get much more difficult in the third and fourth quarter.
>> earnings news has moved some stocks. red hat was up more than 10% on better-than-expected first-quarter results. the linux operating system distributor exceeded first-quarter targets by 30%. pixar’s 14% drop, at its worst, showed the market ‘s reaction to disappointing results. computer animation film studio cut its second-quarter forecast by 30% citing a shortfall from the sales of the crbility. overall, some say earnings season will be a positive catalyst for stocks. >> there is positive momentum building in the marketplace for the upcoming earnings season. we expect better-than-expected earnings season, with 10% growth ratherive to the consensus forecast of 7% growth. dow kicks off the―alcoa kicks off the official earnings season next thursday.
>> also focus on the fact that today was the start of the third quarter. deborah kostroun has this report from the big board.
> friday was the first trading day of the third quarter and second half of the year. looking at how he stand, the major averages year to date, the dow still down 4.5% for the year. the s&p 500 down 1.4% and the nasdaq down 5.4%. in friday’s session, some of the things that traders focusing in on, a stronger manufacturing report that came out. also consumer confidence increased for the first time this year and also we did have that below-average volume ahead of the three-day weekend. when traders return, we’ll probably look at the second-quarter earnings in earnest. gainers in the s&p 500 today -- energy, autos and utilities. remember that energy and utility stocks some of the best performers in the first half of the year and continuing with leadership in the first day of trading for the third quarter. auto stocks, general motors, biggest gainer in the dow jones industrial average. that after their sales last month jumped 47% from a year earlier and they sold the most vehicles in the month of june since september 1996, thanks to that extension of employee discounts for all buyers. daimlerchrysler reporting on friday afternoon that they will be offering the same employee discounts for its buyers starting july 6. you did see spill-over into auto parts makers. visteon, the biggest gainer in the s&p 500. crude oil with its first increase in four days. crude oil adding quite a bit. $2.25 a barrel tacked on. x.t.o. energy upgraded at goldman sachs on the day. looking at microsoft and i.b.m., or at least i.b.m. microsoft agreed to pay i.b.m. $775 million. the settlement with microsoft in claims stemming from the u.s. government anti-trust case in the late 1990’s. also, i.b.m. agreeing not to bring other claims per two years. i’m deborah kostroun at the new york stock exchange.
>> tonight does kick off the fourth of july weekend. but beer makers anheuser busch and s.a.b.miller may have nothing to celebrate. both companies, which cut prices at the end of may to boost demand, sold less beer in the month ending june 11 than the previous year. more consumers are turning away from budweiser and miller brands in favor of wine, spirits and higher end beers. the amount of wine sold in the u.s. rose 2.6% at the same time that spirit sales rose 4.1% and beer volume for cons flation -- constellation brands, importer of premium beers, rose over 8%. we see a one-year graph of anheuser busch in white, constellation brands in yellow and s.a.b.miller in red. miller making gains of 25% in the past 12 months, so falling sales have kept the stock relatively unchanged in 2005. looking at shares of constellation brands, up over 60% in the past 12 months. consumers may see further price cuts from anheuser busch and s.a.b.miller this summer, which industry consultants say is a sign that beer demand may not pick up for the rest of the year. energy, a major theme in the trading today. will that continue in the third quarter? ernie ankrim joins us next.
