Markets Get Boost; But Jitters Linger
By GREGORY ZUCKERMAN
Staff Reporter of THE WALL STREET JOURNAL
Will there be a February Effect to boost stocks? It won't come easy.
Aggressive action by the Federal Reserve to slash interest rates has helped to revive the Nasdaq Composite Index, which was up 12.2% in January, one of its best Januarys ever and the first month of gains for the technology-dominated index since August. The performance met some analysts' definition of a January Effect, when stocks (particularly smaller ones) show a spark at the start of a year.
Showing its own resilience, the Dow Jones Industrial Average has also been solid. Before weakening Friday afternoon, the blue-chip average had even briefly re-crossed the 11000 milestone, a level it hasn't closed above since mid-September, amid hope that the economy will rebound during the second half of the year.
But like a swimmer in a pool's deep end, some analysts say stocks could tread water until signs appear that the economy, and corporate profits, are again rising. The economy's lifeguard, Fed Chairman Alan Greenspan, may be able to do only so much for stocks, these analysts say.
Indeed, in January, he cut interest rates not once but twice, and the first cut had a much-larger impact. "We've had our January rally, a 'dead-cat bounce,' but the market will be jittery going forward for a while," says Lee Kopp, president of Kopp Investment Advisors in Minneapolis, who predicts stocks will nonetheless do well later this year. Dead-cat bounce is a common term on Wall Street for a brief rally during a weak period.
On Friday, the Dow industrials fell 1.1%, or 119.53 points, and the Nasdaq fell 4.4%, or 122.29 points. For the week, the Nasdaq fell 4.3% to end at 2660.50 -- all of it because of Friday's drop -- and the Dow industrials rose 1.9% to end at 10864.10.
The Nasdaq composite remains well ahead in the year-to-date race among U.S. stock indexes, however. Bouncing back smartly from last year's 39% tumble for the full year, the index is up 7.7% so far this year, while the Dow industrials are up less than 1%. Showing small stocks' strength, the Russell 2000 small-stock index is up 3.7%. All of these gains came in the aftermath of the Fed's surprise between-meetings interest-rate cut Jan. 3.
Last week, the Fed matched the early January half-percentage-point cut with another one, moving aggressively to keep the economy from slipping into a recession. The cuts, combined, were the Fed's most forceful action to cut rates and boost the economy since 1982. When the Fed lowers rates, the stock market usually goes up, as it did on Jan. 3, when Nasdaq enjoyed its biggest one-day rally in history.
So why did investors largely shrug off last week's rate cut? For one thing, it was well telegraphed, and many parts of the market -- especially the Nasdaq -- had already climbed in anticipation.
In fact, stock and bond prices anticipate several more rate cuts this year, but it remains to be seen whether they will have the bullish immediate impact of the early-year surprise gift. Judging by prices in the bond market and sentiment in the stock market, many investors are even betting on a surprise rate cut this month, before the Fed's next formal interest-rate meeting on March 20.
"The market is saying there's a 70% chance of an intermeeting rate cut before March," says Bill Rhodes, chief investment strategist at Williams Capital Group in New York.
If most investors expect a surprise rate cut, it won't be much of a surprise, or course. If it comes, it could just give minimal help to stocks; and if it doesn't, there could be danger.
It is unclear whether investors can really count on a series of aggressive rate cuts, anyway. Friday's mixed employment report and signs that the auto and housing markets may be rebounding suggest to some analysts that Mr. Greenspan will return to being a gradualist, cutting rates less aggressively going forward.
The Fed, for all of its powers, is perhaps most able to affect sentiment, rather than fundamentals, in the economy and in the stock market. The strength in autos, housing and recently in stocks and corporate bonds suggests the rate cuts are beginning to have some impact.
Now comes the hard part: waiting for the economy itself to truly turn around. The stock market's losses on Friday mean "we may be getting the first taste of reality sinking in," says James Paulsen, chief investment officer at Wells Capital Management. "The most important issue now is not whether we're going to get a recession or not, but for how long we'll have sluggish growth."
Some analysts worry that it may take a while before any economic recovery even gets under way. For one thing, both consumers and companies are struggling under the weight of a record debt load. A number of analysts predict that it will take a while before this debt is worked off, enabling spending to pick up once again. Rising unemployment would probably slow this process, they say. And it could be that consumers won't be in the mood to go on a spending splurge soon.
"There's been 10 years of buying and Americans have all the computers, cars and homes they need for a while," says Mr. Paulsen, who predicts sluggish growth of around 2% for at least a year, much like the early 1990s. "The real problem is saturation, and the only solution there is time."
At the same time, companies in many sectors have been on an investment spree in recent years, driven by the embrace of new technology, building business capacity that now has to be filled. That, too, takes time to materialize.
"This slowdown is different than most others; it's starting with a capital-spending slowdown, and then it will hit employment and consumers, so it will be a long, drawn out process," predicts Alan Kral, a portfolio manager at Trevor Stewart Burton & Jacobsen Inc. in New York.
That isn't to say stocks are going to tumble. With tax cuts seemingly on the way, and the Fed set to keep cutting rates, some say investors should grin and bear turbulence in the market.
"We've got low inflation, a friendly Fed and tax cuts, the three ingredients I ask for any time, anywhere," says David Sowerby, portfolio manager at Loomis Sayles & Co. in Detroit. "I worry about the economy," he adds, but the Standard & Poor's 500-stock index, up a modest 2.2% for 2001, "will be 10% higher by the end of the year."
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com |
