COMMODITY INSIGHT
152 Ennis Lake Road, Ennis, Montana
(March 23, 1997)

FINANCIALS:

The stock and bond markets continued lower this week with nearby bond futures falling to their lowest levels since September 25. If bond prices do not soon mount a rally, a case can be made that another 2 to 5 full-point break will happen shortly.

Though the bond market appears to be in a great deal of trouble, the stock market continues to hold up rather well. This week for instance, when bond prices hit nearly a six-month low, the equity markets were only able to hit the levels of last February. Compared to bonds, stocks are still doing quite well.

However, bonds dictate the lead of stocks. And with bond prices on the defensive, those bullish towards stocks have to hope that bonds can mount and sustain some sort of rally in the near term. The stock market is not going to like it if bonds drop another 2 to 5 full points from current levels.
Adding to the woes of the bond markets is the Federal Reserve. Chairman Greenspan, speaking before Congress this week, all but admitted that the Fed is on the verge of raising rates this coming Tuesday. If the Fed embarks on a tighter monetary policy, it will eventually prove bearish for stocks and bonds.

But do not be surprised if stocks actually rally following a modest increase in rates. But further rallies will be more difficult to come by if the Fed continues to raise rates in the months ahead. And all my work suggests that is exactly what they have up their collective sleeves.
Jerry F. Welch

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