Joe Battipaglia

Little cause for inflation concern Raising Nasdaq target to 3,100

By Joseph V. Battipaglia Last Update: 10:25 AM ET Nov 1, 1999 Commentary Section Analyst Forum

NEW YORK (CBS.MW) -- As we expected, we continue to see evidence of strength in the U.S. economy with little cause for concern about inflation. These conditions were again confirmed by last week's release of third quarter, 1999 gross domestic product data. See full story. The report showed that the U.S. economy grew at an impressive 4.8 percent annualized rate and that inflation, as measured by the price deflator, remained muted at 1 percent. While the low inflation number was a surprise to some, the overall report remained entirely consistent with our long-held outlook for the economy. I believe that we are living through a period of "return to normalcy" following sharp declines in global output associated with the emerging market crisis of 1997-1998. This is not the beginning of a new era of excessive inflation and/or massive tightening by the Federal Reserve. Data released by the Organization for Economic Co-operation and Development supports this. They expect that growth will continue to rebound as inflation continues to abate. I believe that investors should welcome this growth and move toward the opportunities created in financial markets as this latest period of Federal Reserve intervention wind down. As such, we continue to believe that investors should not fear global recovery or be concerned about a modest reflation of some prices. The days of impending global recession and spiraling deflation are behind us. The GDP report was followed by more inflation friendly news in the Employment Cost index. By this measure, total wages rose 0.8 percent in September and the year-over-year pace of growth slowed to 3.1 percent. As it was in 1994, I believe this level is sustainable without inflation given the strong trend of rising productivity. Also as expected, it now appears that earlier spikes in wages were aberrations and pose no meaningful threat to financial markets.

Further Fed action unnecessary

Looking further out, I remain convinced that additional action by the Federal Reserve is not necessary. I believe short-term rates are at a proper level given present conditions in the real economy. The bond market has anticipated a move by the Federal Reserve and already priced much of this into bond prices. The Federal Reserve's latest actions will strengthen the effect of future monetary policy in the event of unforeseen developments in the economy.

Raising Nasdaq target

Once again, I believe that the market will continue to rally through the end of the year on strong earnings, absence of Federal Reserve action, and the passing of any lingering Y2K concerns. My index targets remain 12,000 for the Dow 30, 1,600 for the S&P 500, and I am raising my target for the Nasdaq composite. My Nasdaq composite target of 2,900 has been achieved and it is now possible that we will see 3,100 on the Nasdaq Composite by year-end.

Joseph V. Battipaglia is chairman of investment policy at Gruntal & Co.

Does this mean we are at the beginning of a new bull run or is it smoke and mirrors?

-- RC White (cw5410@netscape.net), November 03, 1999

Answers

Rc, My projection for the NASDAQ is 1200 and it's just as valid as his. Maybe more, since I know something he doesn't know--that performance is based on the future and not the past.

-- Mara (MaraWayne@aol.com), November 03, 1999.

"The days of impending global recession and spiraling deflation are behind us."

-- have to (remember@this.one), November 03, 1999.