Fed's Rate Cut Highlights Bulls' Return to Wall Street

The Federal Reserve's unexpected interest-rate cut gave Wall Street a triple-digit rally and one of its strongest performances this year. But the real news may be that the bulls are re-emerging.

After months of uncertainty about where stocks are headed, a growing number of analysts believe the worst may be over for the markets.

"While we may see some pullback because this has been such a big day, I do think the trend is upward from here," said Matt Brown, head of equity management at Wilmington Trust. "There's a strong correlation between aggressive Fed action and improved stock market performance."

Confidence Boost

The optimism comes despite expectations that corporate earnings will continue to be weak for months and a Fed statement Wednesday indicating it is quite concerned about the economy.

Analysts say stocks will definitely slide again, but what's changed is their confidence. They're more convinced than ever that the stock market — and the economy, albeit at a slower pace — are starting to improve.

"As far as the kind of devastation we saw in 2000, the worst is over. We might test our lows again, but as far as the free-fall we saw, that has come to an end," said Charles Pradilla, chief investment strategist at SG Cowen Securities. "This is not the end of the market's problems, but the beginning of its healing process."

The Fed said it was cutting rates for the fourth time this year because of "rising uncertainty about the business outlook," among other concerns. But those worries — and the fact the Fed took the unusual step of acting between regularly scheduled meetings — failed to dampen Wednesday's enthusiasm.

Investors sent the Dow Jones industrials up nearly 400 points, while the Nasdaq composite index — which remains in a bear market — rose 156 and the Standard & Poor's 500 index gained 46.

"The stock market's recovery usually occurs before the economy's," said Jeff Hirsch, publisher of the Stock Trader's Almanac. He said that since 1949, the average gain realized from between the time the Dow bottomed to an end of a recession was about 24.5 percent.

"So if the Dow bottomed in March … then we're looking at the Dow reaching 11,337 by the end of the year," he said. "That's what people are betting on by investing now."

Turnaround Expected

But what's got most analysts in a better mood are other indications that a recovery is beginning. Stocks had been steadily advancing on their own for the last two weeks, even though a Fed rate cut wasn't expected until May.

The reason: earnings reports that were weak, but not as bad as expected, and indications from some technology companies, particularly chip maker Intel, that business will pick up later this year.

Stock prices are a lot lower and, many believe, now reflect whatever bad news is ahead for companies. When the Fed cut rates previously, stock valuations were pricier and the economic outlook was more bleak. While some stocks are still pricey, there is growing sentiment that there are some long-term bargains out there.

"The odds favor that the worst is over and we'll see pullbacks instead of trashing on the markets," said Gary Kaltbaum, market technician at Investor's Edge Partners.

But he is concerned the Fed action may have resurrected some of the irrational exuberance that led up to the sell-off of 2000. "The Nasdaq has gotten very frothy, very quickly. It's a bit worrisome."

Ultimately, though, the best indicator of market sentiment may rest with individual investors, like Mauricio Salazar, who has started buying stocks after a six-month hiatus because of the market volatility.

"You still have to be cautious, but I think the market has bottomed out," said the 63-year-old retired executive from Houston. "The Dow's rally is very encouraging."

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