Fed's Rate Cut Highlights Bulls' Return to Wall Street
N E W Y O R K, April 19, 2001 -- The Federal Reserve's unexpected interest-ratecut gave Wall Street a triple-digit rally and one of its strongestperformances this year. But the real news may be that the bulls arere-emerging.
After months of uncertainty about where stocks are headed, agrowing number of analysts believe the worst may be over for themarkets.
"While we may see some pullback because this has been such abig day, I do think the trend is upward from here," said MattBrown, head of equity management at Wilmington Trust. "There's astrong correlation between aggressive Fed action and improved stockmarket performance."
Confidence Boost
The optimism comes despite expectations that corporate earningswill continue to be weak for months and a Fed statement Wednesdayindicating it is quite concerned about the economy.
Analysts say stocks will definitely slide again, but what'schanged is their confidence. They're more convinced than ever thatthe stock market — and the economy, albeit at a slower pace — arestarting to improve.
"As far as the kind of devastation we saw in 2000, the worst isover. We might test our lows again, but as far as the free-fall wesaw, that has come to an end," said Charles Pradilla, chiefinvestment strategist at SG Cowen Securities. "This is not the endof the market's problems, but the beginning of its healingprocess."
The Fed said it was cutting rates for the fourth time this yearbecause of "rising uncertainty about the business outlook," amongother concerns. But those worries — and the fact the Fed took theunusual 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 theeconomy's," said Jeff Hirsch, publisher of the Stock Trader'sAlmanac. He said that since 1949, the average gain realized frombetween the time the Dow bottomed to an end of a recession wasabout 24.5 percent.
"So if the Dow bottomed in March … then we're looking at theDow reaching 11,337 by the end of the year," he said. "That'swhat people are betting on by investing now."
Turnaround Expected
But what's got most analysts in a better mood are otherindications that a recovery is beginning. Stocks had been steadilyadvancing on their own for the last two weeks, even though a Fedrate cut wasn't expected until May.
The reason: earnings reports that were weak, but not as bad asexpected, and indications from some technology companies,particularly chip maker Intel, that business will pick up laterthis year.
Stock prices are a lot lower and, many believe, now reflectwhatever bad news is ahead for companies. When the Fed cut ratespreviously, stock valuations were pricier and the economic outlookwas more bleak. While some stocks are still pricey, there isgrowing sentiment that there are some long-term bargains out there.
"The odds favor that the worst is over and we'll see pullbacksinstead of trashing on the markets," said Gary Kaltbaum, markettechnician at Investor's Edge Partners.
But he is concerned the Fedaction may have resurrected some of the irrational exuberance thatled up to the sell-off of 2000. "The Nasdaq has gotten veryfrothy, very quickly. It's a bit worrisome."
Ultimately, though, the best indicator of market sentiment mayrest with individual investors, like Mauricio Salazar, who hasstarted buying stocks after a six-month hiatus because of themarket volatility.
"You still have to be cautious, but I think the market hasbottomed out," said the 63-year-old retired executive fromHouston. "The Dow's rally is very encouraging."