THE WEEK AHEAD: Finally, Fed's intentions will be known

Larry Dignan
3 min read

After weeks of speculation, the Federal Reserve finally meets to decide what to do with interest rates on June 29 and June 30 and the markets will finally be able to move on.

The Fed's going to raise interest rates. The good news about that is most tech stocks already have the rate increase factored in.

Fed Chairman Alan Greenspan left little doubt that the Fed would raise interest rates two weeks ago when he told Congress that he wasn't opposed to a preemptive strike against inflation. But Greenspan also said that one increase doesn't exactly mean a series of hikes are on deck.

Those comments perked up Internet stocks, the Dow Jones industrial average and the Nasdaq at the beginning of the week until the pre-Fed meeting slump kicked in.

So now what?

Look for flat trading and even some buying once the uncertainty over rates is lifted. James Preissler, an analyst at PaineWebber, said his firm estimates the Fed will increase rates by 25 basis points. " We believe this expected increase of 25 basis points is already fully priced into the Internet stocks," said Preissler.

Preissler also went on to document what happened to Net stocks back in 1997 when the Fed last upped interest rates. The last increase in the Fed rate took place on March 25, 1997 and PaineWebber's composite of 60 Internet stocks, indexed to January 1, 1996, bottomed out on March 19, 18.4 percent below the previous peak on January 21, 1997. The day of the increase and the day following the increase in 1997, the index was slightly up and for a month stayed flat, before turning positive.

If that sounds vaguely familiar that's because it is. Up until last week, Net stocks were tumbling on interest rate fears even though a rate hike was just an excuse for investors to cash in some gains. Barring some major Fed surprise, tech issues should remain unaffected just like they were in 1997.

"The general sell-off in the Net stocks and tech sector should be over," said Alex Cheung, portfolio manager for the Monument Internet Fund. "The market may react if the Fed does more than what it said it would."

Cheung also isn't worried about a follow-up rate hike. "There's a possibility of another one, but there will be a time lag," he said. "The Fed will wait a quarter or so to see how things go."

There has been speculation that the Fed won't raise rates just this time, but again at its August 24 meeting. However, there's a lot of economic data due between now and then.

Of course another quarter from now Net stocks will be flushed with e-commerce hype. Interest rates? What me worry?

Choppy week, earnings woes

For the week, the Dow Jones industrial average fell 303 points to close at 10,552.56 while the Nasdaq composite dropped 11 points to 2,552.65.

Matters weren't helped by some bad news from leading memory chipmakers Advanced Micro Devices Inc. (NYSE: AMD) and Micron Technology Inc. (NYSE: MU).

AMD pulled its typical quarterly warning, telling Wall Street that it will lose upwards of $200 million this quarter. It's the same old song and dance, but investors are still holding out hope for this dog.

Micron Technology's third-quarter earnings didn't provide much more optimism. It lost $28 million, or 10 cents a share, on sales of $864 million.

First Call consensus expected it to break even in the quarter.

Those two dismal bits of news watered down the entire chip sector this week. But with more earnings due out in the next couple weeks, maybe they'll be seen more as an aberration than a barometer of things to come.