Fed Holds Key to Stocks in 2001, Merrill Says

Merrill Lynch & Co., the biggest U.S. brokerage, said U.S. blue chip stocks could gain as much as 27% over the next year--if the Federal Reserve begins to cut interest rates in 2001.

Merrill, in its annual forecast, said it expects the Standard & Poor’s 500 index to end next year at 1,720, a 27% gain from Wednesday.

But “the upside is critically dependent on an aggressive Fed easing,” said David Bowers, Merrill’s chief global investment strategist.

“If the Fed eases and prospective earning growth improves, equity returns should rise,” Bowers said. He also said a market advance will depend on inflation remaining low.

Federal Reserve Chairman Alan Greenspan hinted strongly Tuesday that the Fed is ready to cut rates in 2001, assuming economic growth continues to slow.

Bowers said investors should concentrate on sectors such as utilities and energy in the U.S. because demand in those industries remains strong and there has been an under-investment in capacity.

Merrill’s model portfolio now is 60% stocks, 30% bonds and 10% cash.

Bowers said the main risk investors face is that central banks worldwide fail to cut interest rates sufficiently in 2001. If investors are disappointed in the amount of easing, any optimism that remains in the equity markets probably will disappear, he said.