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Worries Deeper Than a Rate Cut

Wall Street: Faced with an ominously uncertain global picture, investors are taking little solace from recent Fed moves.

October 03, 2001|From Times Wire Services

The Federal Reserve's fresh dose of interest-rate cuts may eventually help U.S. stocks regain their health, analysts said Tuesday, 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.

That was evident Tuesday after U.S. markets managed only a muted rally in response to the Fed's ninth rate cut this year.

Analysts said the advance, which focused on blue-chip and other well-known stocks, didn't reflect a change in investors' generally dim view of the economy and business climate. With prices still depressed despite last week's big rally, investors sought stocks that have suffered the most lately or that seem relatively secure amid political and economic uncertainty.

The Dow Jones industrial average closed up 113.76 points, or 1.3%, at 8,950.59. Broader indexes also were higher. The Standard & Poor's 500 index rose 12.78 points, or 1.2%, to 1,051.33, while the Nasdaq composite index was up 11.87 points, or 0.8%, at 1,492.33. Airline, natural gas exploration and retail stocks were among the leading sectors.

The Fed's half-point cut had been widely anticipated because of the severe effect of last month's terrorist attacks on the already weak economy. It was the second rate cut in just over two weeks.

In a statement accompanying Tuesday's action, the Fed indicated that the attacks had significantly heightened uncertainty and that there is a risk of economic weakness ahead.

That pessimistic tone might have contributed to the market's quiet reaction to the rate cut, although the Fed was echoing what many economists have been saying. Also, with the Fed's short-term interest rate target now at 2.5%, there isn't much more to cut.

In addition to the weakening economy and a continuing chorus of corporate profit warnings, Wall Street also is worrying about U.S. reprisals for the attacks.

"Those three issues overshadow the positive effects of the continued Fed rate cutting," said Erik Gustafson, portfolio manager at Stein Roe & Farnham. "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."

Despite a substantial bounce last week and a modest uptick Tuesday, the Standard & Poor's 500 index is down almost 4% since the Monday before the attack.

Damage to the Nasdaq composite index is even more severe. It's down about 12% since Sept. 10, while the Dow Jones industrial average--which two weeks ago had its worst weekly performance since the Depression--is down almost 7%.

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

In the six months after the Fed's first rate cut of the year, in early January, the S&P fell 8.4%, its worst such performance after the start of an easing cycle in some 50 years.

The S&P 500 has fallen about 20% 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. "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 last 13 Fed easing cycles--the one beginning in August 1968--did the S&P 500 post a loss one year after the cycle's start.

Advancing issues led decliners 2 to 1 on the New York Stock Exchange and by 5 to 4 on Nasdaq. Trading was active.

Among Tuesday's market highlights:

* The Dow was lifted by buying in Boeing, up $1.85 at $34.25. Boeing said China has ordered $1.6 billion of its 737 jetliners. Wal-Mart Stores, another Dow stock, gained $2.24 to $52 although retail sales are expected to suffer in the coming months.

* A third-quarter earnings warning from Compaq Computer sent its stock down 17 cents to $8.16, in selling that spread to other computer-related businesses. Texas Instruments dropped $1.85 to $23.14, while Apple Computer lost 49 cents to $15.05.

* Financial stocks, usually beneficiaries from rate cuts, rose on the Fed move. Citigroup gained 50 cents to $42.25, while JP Morgan Chase rose 99 cents to $34.99.

* Pharmaceutical stocks were mixed. Johnson & Johnson was down 43 cents at $54.99 on profit-taking from last week's rally. But Merck was up 12 cents to $68.44.

* After the market closed, Nortel Networks warned of weak quarterly results and 20,000 additional job cuts, about 31% of its work force. The stock fell 23 cents in extended trading after having lost 18 cents to $5.29 in the regular session.

Market Roundup: C8, C9

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