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Here are highlights of the notes from weekly meeting of Standard & Poor's Global Investment Policy Committee, held May 17, 2006:
Economic Outlook Longer-Term: S&P expects the core CPI to reach 2.5% by year-end. Inflation is a lagging indicator, and if the Fed chases the inflation rate too closely, we think it will overreact and raise interest rates too much. If the evidence of slowing growth seems clear, we believe the Fed will no longer raise rates. If the evidence is unclear or the economy continues to surprise on the upside, however, we think the Fed could go too far by raising rates to 5.5% or higher, and then be forced to loosen them in 2007.
S&P's Recommended Investment Allocation
Asset class
%
U.S. Equities
45%
Foreign Equities
20%
Bonds
20%
Cash
15%
Market Outlook Fundamental Outlook: The S&P 500 Index is experiencing heightened volatility in the face of increased inflation fears. Stubbornly high energy and industrial commodity prices are fueling fears the Fed will have to continue tightening monetary policy to combat mounting price pressures, in our view.
Although higher interest rates may lead to modest p-e contraction near term, S&P believes attractive valuations will likely limit the downside. The S&P 500 index is trading at 15 times estimated 2006 earnings, a significant discount to its long-term average.
Technical Outlook: We believe the major indexes have finally entered a corrective phase for the first time since the September/October time period. The S&P 500 index has taken out some key short-term support levels, and we think there will be further downside to the 1246 level.
Bond yields have really flattened out and may be consolidating before another move higher. Potential chart support for 10-year Treasury yields sits in the 5.25% to 5.5% zone, in our view. We believe yields may have to back up to this area before we get a pause in the yield rally.
Crude oil is testing the recent lows in the $68 to $69 area, after tracing out a series of lower highs since peaking on April 21. We continue to believe that oil prices have entered an intermediate-term correction and think that prices could fall into the low $60s.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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