If you compare this slowdown/recession to the last one in 1990/91, Fed Funds peaked in April 1989 @ 9.75% - it took 20 months to drop rates 2.75% (the amount we'll have if Fed drops .25 in June) - it took us 5 1/2 months. In Dec 1990, the FF rate was 7% and this was 2 months after the low in the Recession, which began in July 1990. From the lows in Oct 1990, the Nasdaq rallied strongly and never looked back (it rose for 7 straight months) and rose a total of nearly 92% in 17 months. This hasn't happened here (rallying strongly from the March/April lows each month). Perhaps the differences are 2 fold. One, we had entered Recession in 1990 and so the Fed picked up its pace of drops - 1.5% prior to the Recession (8 months), but 2.25% over the 9 months of Recession plus an additional .25% cut in the month following. Two, the time differences allowed the cuts to begin affecting the economy before Recession - when the Recession began, it had a .50% basis cut 1 year earlier to work off of. Further, a total of 1% in rate cuts during Oct, Nov and Dec, 1989 kicked in during the Recession.
In our current situation, we won't see the effects until Jan, 2001 with significant stimulus in Q1 & Q2 2002.
During the period leading up to the 1990/91 recession, we did have monetary policy stimulus just as we have now, however, I don't believe we had a tax cut working for us then. It may be that the only reason we avoid a Recession is the tax cut which will add anywhere from .4 to .75% to GDP in Q4.
If we follow the 1990/91 Recession, we will enter one in Q3 and the market will bottom in Oct 2001. From there, it should be very positive for 1 1/2 years. This scenario makes sense perhaps as a worst case. A best case scenario would have us trade in a range (down to Nasdaq 2000) through Q2 earnings with a gradual rise through Q3 and then a more significant rise. A middle of the road scenario has us trading in the range (2000-2300) through Q3 with a significant rise in Nov 2001 and thereafter. This also coincides with the best time for tech stocks (Nov-March).
Any way you cut it absent a major economic disaster, the market should take off during Q4 2001. |
