New York market: Mergers keep the bulls going
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Your support makes all the difference.Profit growth may slow and the economy may be expanding fast enough to push interest rates higher. Still, there's one powerful force behind the long-running bull market that shows no signs of waning: mergers and acquisitions.
"I would bet you there's probably three closed-door meetings going on right now with somebody taking about buying somebody else," said Robert Froehlich, investment officer at Scudder Kemper Investments. "It will probably serve to turbo-charge the market" a little more than profits and interest rates would justify.
Daimler-Benz's agreement to buy Chrysler for $42.3bn gave investors a new angle on big mergers, which until now were concentrated in the financial services industry.
For the week, the Dow Jones Industrial Average fell 1 per cent, closing at 9,055.15 after setting a record 9,192.66 on Monday. The S&P 500 fell 1.1 per cent and the Nasdaq 0.4 per cent. Stocks closed the week on an up note after a report from the Labor Department showed a rebound in job growth and the April jobless rate at a 28-year low of 4.3 per cent.
With the economy humming along, interest rates have crept up. The yield on the 30-year Treasury bond closed the week at 5.98 per cent, up from 5.79 per cent in early April. The employment report boosted concern that the Federal Reserve will increase interest rates to keep a lid on inflation.
"All in all, this wasn't a good report for bonds," said William Stevens, manager at Montgomery Asset Management. "It puts the Fed closer to tightening."
"The Fed has to continue to lean but doesn't have to act," said Steve Lieber at Evergreen Asset Management. That's especially true because the Asian slowdown will be a drag on US growth and profits as the year progresses, said Thomas McManus, an investment strategist in New York. He added that the S&P could fall by 10 per cent because stocks had risen faster than justified.
Government officials also mounted a campaign to cool investors' expectations for the stock market. Federal Reserve vice chairman Alice Rivlin said investors have to be very optimistic about earnings to justify what she called very high stock prices. Still, with almost $800bn in mergers announced this year, investors say stock prices won't plunge. "The mergers and acquisitions point generally to a desire to reduce costs and capacity," said John Bartlett, fund manager for Commerce Bank in St Louis. "That would also have a tendency to support the outlook for profitability on a longer-term basis."
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