Rate Cut's Impact on Stocks Uncertain

The Federal Reserve's fresh dose of interest-rate cuts may eventually help U.S. stocks regain their health, but it has done little to soothe investors' jitters over a fragile global economy, sagging corporate profits and prospects for war. 

"The market is not really Fed-focused. It's focused on geopolitical potentials and earnings and the recession,'' said Robert Stovall, senior market strategist at Prudential Securities. 

Major U.S. market gauges fell, then recovered after the Fed cut interest rates for a ninth time this year as expected in an effort to prop sagging U.S. growth that was damaged further by the Sept. 11 attacks on the World Trade Center in New York and Pentagon near Washington. 

The central bank's rate reduction brought its fed funds rate — a benchmark for short-term rates throughout the nation — down to 2.5 percent, its lowest level since 1962, and the Fed said it was ready to slash rates further to help stave off the growing threat of recession. 

The Fed's aggressive policy will eventually boost stocks and help the economy, which some economists fear has already fallen into recession, analysts said. 

"Ultimately, although expected, it's positive news, certainly for the part of the economy that is interest-rate sensitive, and also because it will put more money in consumers' pockets,'' said Rick Meckler, president of investment firm LibertyView, which oversees about $1 billion. 

But it will be a rocky road to recovery, experts say. Recent Fed rate reductions have left stocks cold, and this one is no exception. With so much stimulus already in the pipeline and with investors grappling with so many unknown variables, its impact will be muted, they said. 

The nation's economic troubles have deepened since the Sept. 11 attacks that decimated the World Trade Center, damaged the Pentagon and left more than 5,700 people dead or missing. 

The U.S. central bank's latest cut came on the heels of a half percentage point rate reduction on Sept. 17, six days after the attack. 

The steady drone of corporate profit warnings has intensified. Among the latest was one from Compaq Computer Corp., which said the weak economy, its merger plans and the chaos after the attacks on the United States will cause it to post a third-quarter loss. 

"The market was a small plant in a garden that was ready to grow, and all of a sudden somebody came along and stepped on it,'' said Paul McManus, director of research at Independence Investment. 


Fear still reigns on Wall Street. Traders worry about U.S. reprisals to the terror attacks, a weakening economy and more companies warning of profit shortfalls. 

"Those three issues overshadow the positive effects of the continued Fed rate-cutting,'' said Erik Gustafson, portfolio manager at Stein Roe & Farnham, which oversees $22 billion. "We have a crisis in confidence right now, and until that confidence is rebuilt, until we see a lower level of fear, the markets are going to continue to struggle.'' 

Even after a substantial bounce last week and a modest uptick on Tuesday, the Standard & Poor's 500 index is down more than 4 percent since the Monday before the attack. 

Damage to the tech-packed Nasdaq Composite index is even more severe. It is down about 12 percent since Sept. 10, while the Dow Jones industrial average — which had its worst weekly performance since the Depression two weeks ago — is down more than 7 percent. 


Even before the attacks, the stock market's reaction to recent rate cuts has been tepid at best. 

In the six months following the Fed's first rate cut of the year, in early January, the S&P fell 8.4 percent, its worst such performance after the start of an easing cycle in some 50 years, according to research firm MarketHistory.com. 

"What the market is trying to figure out is, 'What are earnings going to be?''' Independence Investments' McManus said. ''And the answer is, 'We don't know.''' 

The S&P 500 has fallen about 21 percent so far this year, and the market's inability to regain its footing despite all the efforts to stimulate it may indicate the economic slowdown will be more severe and longer lasting than many Wall Street pros are presently predicting, analysts said. 

"The consensus hasn't factored in anything beyond a mild recession, and that's where the disconnect is,'' said Jon Brorson, director of equities at Northern Trust, part of a group that oversees $390 billion. "The Fed eases, and we still don't get any 'oomph' out of the stock market, because maybe the stock market is saying it's going to even be a more substantial downturn.'' 

History offers some hope, however. In only one of the past 13 Fed easing cycles -- the one beginning in August 1968 — did the S&P 500 post a loss one year following the cycle's start. 

And the buildup of Fed easings could make for an even more pronounced snapback. The additional monetary and fiscal stimulus that the attacks have helped spur make for a better outlook for 2002, said Jeffrey Kleintop, chief investment advisor at PNC Advisors. 

"Thinking of the economy as a spring,'' he said, "the attacks of Sept. 11 pressed down a little harder on that spring ... but the rebound from that spring should be even more dramatic.''