I think today will prove to be a sea change, similar to October 15, 1998 -- the only other time the Fed has cut rates between regular Fed meetings. The October, 1998 rate cut came at a time when NASDAQ was in the midst of a serious decline during a major global financial crisis. The Fed's 25 bp rate cut effectively reversed the market decline and triggered a major market turnaround. NASDAQ's gain 10 days after the rate cut was +9%. 30 days after the rate cut NASDAQ was up 25%. And 80 days after, it was up 43%. The major NASDAQ decline we've been through has underscored the hard-learned lesson not to fight the Fed. Now, the same principle should provide major upside lift.
Today's rate cut was a more dramatic 50 bp cut, and the market's response was more dramatic -- a major reversal on record volume. Tech stocks, which have been in the biggest decline recently, should now be among the biggest beneficiaries. Not only do they and their customers get a more favorable interest rate environment that lowers financing costs, makes investment capital more readily available and draws money from interest rate investments like bonds and money market instruments, but, additionally, the stock market begins to shift its focus from short term worries toward long term potential. One aspect of that shift is that the present value of the future earnings of growth companies is greater in a lower interest rate environment. A more immediate effect is the psychological shift from fear to greed and its impact on market sentiment. You could see that shift writ large in the dramatic response of the large cap tech stocks today. You could also see it in the selling of recent defensive favorites as money shifted back toward the techs.
It takes time for the economic effects of rate reductions to kick in, so there will no doubt be plenty of negative news from earnings warnings and disappointing results. But the anticipation of better times down the road will increase positive expectation and the willingness to commit sidelined money. Though I think many tech companies remain overpriced (including many of the large NASDAQ 100 types that jumped so dramatically today), many others simply sold off along with the NASDAQ decline and have tremendous appreciation potential that should play out well in a more positive market climate. Because many former tech flyers will go down the drain never to return, discriminating stock selection will be particularly important and rewarding. Picking quality companies with the combination of good prospects and attractive valuations should be very rewarding to those with the patience to buy and hold. |
