When will Fed cuts work?
|
|
September 5, 2001: 12:12 p.m. ET
Wall St. still waiting for the expected bounce from seven rate cuts
By Staff Writer Mark Gongloff
|
NEW YORK (CNNfn) - The stock market is playing hard to get.
Historically, U.S. stocks have responded positively to interest-rate cuts by the Federal Reserve, rallying about six months after the first cut. But the Fed has showered Wall Street with seven cuts since Jan. 3, and yet the Dow Jones industrial average and the Nasdaq composite index remain lower for the year.
Fed rate cuts work by lowering the cost of borrowing, making money more readily available to consumers. This is usually good news for the stock market because it means corporate profits will get a boost from additional consumer spending.
Unfortunately, the current economic slowdown is not driven by anemic consumer spending. Consumers, in fact, have been just about the only thing keeping the economy out of a recession.
The real problem has been that businesses have stopped buying products from other businesses, leaving a backlog of unsold goods on manufacturers' shelves. Fed rate cuts aren't enough to convince businesses to make expensive improvements if they're not necessary.
"You don't need to run out and buy a new Dell (DELL: up $0.07 to $22.38, Research, Estimates) computer because rates are lower," said Peter Doyle, chief investment strategist at Kinetics New Paradigm Fund. "Lower rates don't stimulate demand for these types of goods and services."
The inventory overhang has forced manufacturers to brake production and cut hundreds of thousands of jobs, threatening consumer confidence.
"An overly robust economy came to a screeching halt, so there's much more of a backlog of production capacity and inventory," said Art Hogan, chief market analyst at Jefferies & Co.
Click here for more on the Fed and rates
Some observers believe the Fed's interest-rate hikes in 1999 and 2000 snuffed capital spending and caused the mess we're in now. There's even been speculation that rate cuts won't work at all this time.
"Historically, six to nine months after rate cuts, the economy stabilizes and starts to swing in the other direction," Hogan said. "But a lot of things are different this time. The Fed came off an aggressive tightening mode, and there's a global economic slowdown. It's just going to take a while longer this time."
Recent economic data have been encouraging, however, particularly Tuesday's report that the National Association of Purchasing Management's index of manufacturing activity was much stronger than expected in August. The news triggered a short-lived surge in U.S. stock prices, even as other recent good economic data have been ignored by a skeptical Wall Street.
"The market has done a good job of ignoring signs we have bottomed," said Al Goldman, chief market strategist at A.G. Edwards. "That's more a ghost of the bear market than any disbelief in the numbers. A dog that's mistreated doesn't trust a hand extended in kindness. This will change."
Click here for CNNfn.com's economic calendar
Goldman pointed out that, though the major indices have fallen this year, the ratio of the number of stocks gaining value to the number of stocks losing value on the New York Stock Exchange -- the advance/decline ratio -- has risen steadily since Jan. 2.
Nevertheless, if companies spend late September and early October warning of disappointing earnings, investors could flee the market again, worried the earnings recovery will be delayed.
"What the market really needs here is stimulant not from the Federal Reserve, but from the CEOs," Peter Cardillo, director of research at Westfalia Investments, told CNNfn's Before Hours. [416K WAV] or [416K AIF]
Still, a complete collapse of investor confidence -- "capitulation" is the technical term -- could pave the way for a sustained rally later on.
"We're getting there now," said Frank Cappiello, fund manager and president of McCullough, Andrews & Cappiello. "People are putting money in bonds increasingly and not buying back technology stocks. This investor sentiment is getting nice and bad, and that's what we need to turn the market around."
|
|
|
|
|
|