Acquisitions and Energy

As we noted last week, the Federal Open Market Committee (FOMC) voted to keep the economy moving at a steady clip by not changing the funds rate from 5¼ percent. U.S. manufacturing unexpectedly rose to its highest level in 14 months because of gains in production and new orders. Treasury yields touched three-week lows despite continuing concern about the sub-prime mortgage market. A flight to quality after terrorist bombings in the U.K. probably contributed to the Treasury rally. The S&P 500 resumed its intermediate-term uptrend but may still need further consolidation.

The stock market this year has been driven by heavy merger and acquisition activity, and a recent slowdown in this trend may become problematic if it continues. The year's record pace of takeovers slowed by 37% in June, according to data compiled by Bloomberg News. Many observers point to the recent IPO of Blackstone Group (BX) as a sign of the top, and the poor performance of the shares so far certainly does not inspire confidence. If the perception that stocks are fully valued at current levels continues to grow, then it may be difficult for the benchmarks to move substantially higher.

Whatever the major benchmarks do, however, it is entirely possible for one or more industry sectors to buck the trend. Energy stocks rose today as crude oil touched a ten-month high. Analysts are expecting inventories to decline as demand increases later this year, and that usually spells higher prices. As always, we expect energy to be volatile but momentum is still firmly bullish.