Main Street Pain Trumps Fed

On a day when the Fed's extraordinary 75-basis-point rate cut could not inspire a positive day in the U.S. stock markets, Apple (AAPL Quote - Cramer on AAPL - Stock Picks) reminded investors that more pain is in store from the economic fallout of a national downturn in the housing market.

Apple, the king of gadgetry that has been a longtime Wall Street star for its ability to woo American consumers with iPods and iPhones, reported a 57% jump in first-quarter profits that blew away analysts' estimates. That said, its sales and earnings outlook for its second quarter was well below expectations.

The company forecast a profit of 94 cents a share for the current quarter, far short of the $1.09 a share that analysts were expecting. Its revenue forecast also fell short, coming in around $6.8 billion, compared with the $6.99 billion analysts had predicted.

The disappointment underscored the painful reality that the 2008 outlook for U.S. consumer spending, the nation's main engine of economic growth, is getting bleaker, and there's probably little that the Federal Reserve or Congress can do about it. Apple shares were selling off more than 10% in after-hours trading following the report, after dropping 3.5% during the regular trading session.

Apple's decline came amid a selloff in the broader stock market. That decline inspired Fed Chairman Ben Bernanke to abandon his heretofore cautious approach to easing Fed policy as the likelihood of a U.S. recession increases.

Following a series of selloffs in key overseas stock markets like China and India while the U.S. was on holiday on Monday, the Fed announced it was lowering its fed funds rate target to 3.5%, cutting rates by more than 50 basis points at once for the first time since 1982.

Bernanke made the surprise move with a regularly scheduled Fed meeting just a week away. But with stock markets in Asia reeling and recession fears spreading fast, the central bank started chopping early to prevent all-out panic from hitting U.S. shores. Meanwhile, Bernanke signaled to the market that he was only getting started.

In a statement released Tuesday, the Fed said it "will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."

Fed funds futures markets were recently pricing in a 74% chance that the Fed will cut rates again next week by 50 basis points. Meanwhile, the yield on the 10-year Treasury note was down 16 points to 3.48%, signaling that investors see rates going lower.

Major U.S. stock prices plunged early in the session, with the S&P 500 down almost 3% at its low. The Fed inspired a rebound, but investors couldn't stop the bleeding. The Dow Jones Industrial Average and the S&P 500 both finished down 1.1%, while the Nasdaq Composite lost 2%.

"What's most significant is that stocks did not close in the green, so this wasn't a clear all-systems-go rebound on the Fed's action," says Phillip Roth, chief technical market strategist with Miller Tabak & Co.

While Bernanke stemmed the tide with Tuesday's action, he also signaled to investors that previously his Fed was behind the curve on the risks facing the economy.

"First they were too slow to act, and then they kind of freaked out on Tuesday," says Woody Dorsey, president of Market Semiotics. "This Fed doesn't look very good, and we're now in a bear market. It's been coming for a while, but it really got going last week. We made a low on Tuesday, but it's not the low. There's more to come."

Despite the intense gloom before the Fed's action on Tuesday, some investors were looking for an opportunity to buy stocks into the selloff. Even while he predicted a U.S. recession, Banc of America Securities analyst Tom McManus said he was raising his exposure to equities in a note to clients late on Monday.

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