Wednesday's Market: After Fed Cut, Dow Closes Narrowly Higher; Nasdaq Finishes Underwater
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The days leading up to a Federal Reserve meeting are frequently volatile, marked by rumors and nervousness over what the committee is going to do. When it finally goes ahead and does the expected, it's a bit anticlimactic, as it was today. The Federal Reserve cut the fed funds rate by a half percentage point, to 5.5%, this afternoon. It also signaled that more rate cuts are likely coming down the line.
That knowledge, already assumed by the stock market, translated into a brief slide in stocks, followed by a few quick gyrations in the market. Ultimately, most major indices ended slightly lower, with the Nasdaq Composite Index faring the worst, losing 66 to 2773. Investment managers attributed the losses as a typical "sell the news" reaction to a major news event, as well as disappointment over a couple of key earnings reports released this morning or following yesterday's close. The Dow Jones Industrial Average gained 6 to 10,887, and the S&P 500 dropped 8 to 1366.
Retail stocks gained sharply, partially due to the rate hike, and oil and gas stocks strengthened, but technology was generally weaker, particularly the software and personal computer stocks.Now that the big event has been safely put out of the way, a number of strategists believe the market is likely to engage in a bit more bouncing around, some consolidation and a bit of directionless trading as investors get past the dreary earnings season and search around for another event to focus on. Many said the next verse is the same as the first -- don't fight the Fed. "The background will stay positive as long as the Fed talks about the bias toward lower rates," said Bob Lee, senior vice president of Sentinel Advisors in Montpelier, Vt. "We're probably still going to get somewhat slow readings on the economy. As long as that's the case, the market will continue to assume the Fed will do what it needs to." But investors, mindful of the Comp's sharp rally between this and the Jan. 3 rate cut, foresee technology stocks taking a breather for some time. Earnings reports and expectations for growth are a crutch for that sector, and money managers are aware that tech stocks have outperformed through the month. Following last night's earnings warning from Adobe Systems (ADBE), software companies were hit hard today. Adobe declined sharply, losing 17% today. Among other software names getting hit were PeopleSoft (PSFT), which sank despite raising guidance and beating estimates. The stock lost 16% today. Sellers also had their way with AOL Time Warner (AOL), which reported earnings of 28 cents a share prior to today's open, far exceeding expectations. The stock, the most heavily traded on the New York Stock Exchange today, gave up $1.75, or 3.2%, to $52.56. Other key media stocks were in bad shape as well. Disney (DIS) lost 1.5%; Viacom (VIA) fell 2.9%, and Internet company Yahoo! (YHOO) lost 6%.
Please, Sir -- Can I Have Some More?With more rate cuts anticipated, optimism reigns. "Going into February, if there's sentiment that the market is going higher, people may reposition portfolios less conservatively," said Eugene Profit, president and chief investment officer of Profit Funds in Silver Spring, Md. "Now, maybe it's not going to be aggressively, because of bad news from select companies, but net-net, we'll move higher." The anticipation for rate cuts already shows in the fed funds futures contract. The March fed funds futures contract is already fully priced for a 25 basis-point rate cut by the March 20 Fed meeting, the next time the committee gets together, and it's also already got an 80% probability of a rate cut before March 1, which would be an intermeeting move. Based on the Fed's statement , however, Michelle Girard, Treasury market strategist at Prudential Securities, sees the chances of an intermeeting cut as slim. In its statement, the Fed cited weakness in consumer spending and manufacturing activity, and said, "taking that, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy. The longer-term advances in technology and accompanying gains in productivity, however, exhibit few signs of abating and these gains, along with the lower interest rates, should support growth of the economy over time." "The statement kind of explained why they moved so aggressively in January," Girard said. "It suggests we're going to see further ease, but the pace of easing is going to be slower." Girard believes the fed funds rate is likely to drop to 4.5% by the end of the year. Weighing in with a comment, Bruce Steinberg, chief economist at Merrill Lynch, said he expects more gradualism from the Fed, saying cuts are likely in March, May and June. Unlike January, when the market focused on anticipated rate cuts, the market is more likely to focus on economic reports and how they might affect the Federal Reserve's thinking. Whether economic data, financial conditions and company earnings respond to the Fed's actions, or continue to slip further, is the question the market will try to answer in coming weeks and months. Back to top
- America Online: 29.4 million shares. General Electric (GE): 21.3 million shares. Lucent (LU): 20.3 million shares.
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