Four Rate Cuts May Spark Sustained Rally
Thursday April 19, 1:54 am Eastern Time
<<NEW YORK (Reuters) - The rally in stocks on Wednesday after the Federal Reserve's second surprise rate cut in 2001 may just have legs, investors say.
After several false starts earlier this year, beginning with a monster rally on the Fed's other unexpected cut on Jan. 3, investors are thinking the central bank is serious about keeping the U.S. economy out of recession.
The Fed cut the key federal funds overnight bank lending rate by half a percentage point to 4.5 percent.
Wednesday's move ``is recognition that there is a lot of room to cut rates, and the May meeting is too far away,'' said Christopher Conkey, chief investment officer of the equity group at Boston-based Evergreen Investment Management Co., which oversees $90 billion. ``A half (percentage) point cut is aggressive.''
The Federal Reserve typically acts, if at all, at one of its 10 scheduled meetings during the year. This year, faced with a rapid deceleration in economic growth, the Fed has cut rates by 50 basis points twice between meetings and at two regular meetings.
The cut in rates by two full percentage points was the quickest in history, market watchers say, and completely erases the 175 basis points by which the Fed raised rates between June 1999 and May 2000, to forestall inflation.
``There was so much damage done'' from those prior rate hikes,'' said William Rutherford, a portfolio manager with Rutherford Investment Management LLC which oversees $50 million in Oregon. Fed Chairman Alan Greenspan ``needs to be more aggressive. He was delinquent, tardy and behind the curve'' waiting this long to ease.
The last time the Fed changed rates between scheduled meetings of its policymaking Federal Open Market Committee was on Jan. 3 when the S&P 500 index rose 5 percent. But the rally fizzled from February and the S&P scraped out a new 2-year low just this month -- down 28 percent from its high.
The stock market carnage, spurred by fears of falling corporate profits, came despite two other 50-basis-point rate cuts at regularly scheduled Fed meetings in January and March. The central bank panel next meets on May 15.
This defied recent history. When the Fed was last in easing mode, with three 25-basis-point cuts at each meeting from September to November, 1998, it sparked a 168 percent rally in the Nasdaq composite from the last meeting on Nov. 17. That rally peaked when the index closed at a record 5,048.62 in March 10, 2000, according to Instinet data.
The S&P 500 gained 34 percent from the Nov. 17, 1998 rate cut to its peak on March 24, 2000, while the Dow Jones industrial average rose 30 percent before peaking on Jan. 24, 2000.
Evergreen's Conkey agreed the Fed could have eased sooner.
``They stayed too tight, too long last year,'' said Conkey, whose picks include semiconductor equipment makers and the chipmakers themselves, including Texas Instruments Inc. (NYSE:TXN - news), Altera Corp (NasdaqNM:ALTR - news)., and U.S. printer maker Lexmark International Inc. (NYSE:LXK - news).
Conkey, like other money managers, was cautious.
``Typically, most market bottoms are marked by some sort of financial crisis,'' Conkey said. ``I'm curious if the Fed has info we don't have.''
Conkey is expecting more rate cuts.
``I don't think the Fed has finished, there is at least another 50-point cut, and a 100 (points) at the outside,'' he said.
And even with the Fed easing further it may be a while before the market returns to its old highs.
``There will still be some bad earnings coming through because of the slowdown in the economy,'' said Eugene Profit, lead portfolio manager at Profit Investment Management LLC, in Silver Spring, Md., which oversees $100 million. ``Six months from now, we will be higher, but it will take 15 months to get where we were.''>> |
