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TheStreet Open House

Wednesday's Market: After Fed Cut, Dow Closes Narrowly up; 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.

    Major Indices
    INDEX CHANGE % VALUE YR TO DATE
    Dow 6.16 0.06% 10,887.36 0.9%
    S&P 500 7.72 -0.56% 1366.01 3.5%
    Nasdaq 65.62 -2.31% 2772.73 12.2%
    Russell 2000 3.32 -0.65% 508.34 5.1%
    TSC Internet 17.83 -4.41% 386.24 28.5%
    NOTE CHANGE PRICE YIELD
    10-Year Treasury 22/32 104 17/32 5.141%
    Market data as of: 5:21 p.m. EST, Jan. 31, 2001




    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 50 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.

    Market Internals

    Breadth was positive on strong volume on the New York Stock Exchange, weak on strong volume on the Nasdaq Stock Market.

    New York Stock Exchange : 1,769 advancers, 1,371 decliners, 1.26 billion shares. 231 new 52-week highs, 3 new lows.

    Nasdaq Stock Market : 1,767 advancers, 2,066 decliners, 2.23 billion shares. 130 new highs, 19 new lows.

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    Most Active Stocks

    NYSE Most Actives

    • America Online: 29.4 million shares.

    • General Electric (GE): 21.3 million shares.

    • Lucent (LU): 20.3 million shares.
    Nasdaq Most Actives

    • Cisco (CSCO): 81.6 million shares.

    • Intel (INTC): 70 million shares.

    • Oracle (ORCL): 44.9 million shares.

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    Sector Watch

    Start your grinning and drop your linen, because retail stocks were self-starters today. Linens 'N Things (LIN) bounced on the strength of its earnings report, ending the day up 8.4%, and Winn-Dixie (WIN) also gained, finishing up 10.8% today. The S&P Retail Index rose 4%.

    Among the weaker indices were the S&P Insurance Index, which lost 2% in today's session, and the American Stock Exchange Biotechnology Index, which lost 2.5% today.

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    Bonds/Economy

    The Federal Reserve decided at the conclusion of its latest monetary policy meeting to lower interest rates by half a percentage point. In its ongoing attempt to revive the sagging economy, the Federal Open Market Committee lowered the fed funds rate , the interest rate at which banks lend to each other overnight, to 5.5%. At the same time, the Board of Governors approved a 50 basis-point reduction in the discount rate, to 5%. The discount rate is the rate the Fed charges member banks on short-term loans.

    The latest Fed move means that the fed funds rate has been cut by 50 basis points in two consecutive strokes (for a total of 1 full percentage point). The central bank made its previous cut in a surprise intermeeting move on Jan. 3. Today's easing met market expectations, though dire economic data over the past few days had about a third of analysts hoping for a 75-point cut.

    Falling consumer confidence was at the forefront of Fed Chairman Alan Greenspan's concerns, and his team was quick to note that as a basis for their latest decision.

    In its press release accompanying the cut, the FOMC noted that "consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain purchasing and press on business profit margins." It referred to the domino effect this was having in weakening retail sales and business spending on capital equipment, in turn leading to a sharp cutback in manufacturing production.

    Observing that inflation, which has been the reason in the past for raising or steadying rates, remains in control, the central bank asserted that it felt that a "rapid and forceful response of monetary policy" was appropriate.

    The committee continues to keep faith that technological advances will be the engine of economic gains and to accompanying gains in productivity over the longer term; moreover, it feels that lower interest rates will encourage this beneficial effect. The FOMC concluded, however, that current "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

    This is the first time since 1984 that interest rates have been lowered by a total of 1 percentage point in a single month.

    The benchmark 10-year Treasury note closed up 22/32 to 104 17/32, lowering its yield to 5.141%.

    In economic news, the gross domestic product ( definition | chart | source ), which measures the change in total output of products and services in the country, grew by 1.4% in the fourth quarter of 2000. This is lower than the rate of 1.9% forecast by economists in a Reuters poll, and the slowest pace of growth since the second quarter of 1995.

    The Chicago Purchasing Managers' Index ( definition | chart ) dropped to 40.2 in January from 45.2 in the previous month. Expectations were for a drop to 43.2, and the current reading is the lowest since Nov. 1982. A number above 50 signals expansion of manufacturing activity while a number below that signals contraction.

    New home sales ( definition | chart | source ) shot up more than expected, by 13.4% in December to 975,000 units sold, and are at their highest level since Nov. 1998. Low mortgage rates account for the raised number, which is 90,000 units more than the level economists had been expecting.

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    International

    European markets finished mixed, with losses in London and gains in Paris and Frankfurt.

    London's FTSE finished down 37 to 6297.50. Across the channel, Paris' CAC-40 ended up 81.34 to 5998.49. Frankfurt's Xetra Dax gained 55.84 to 6795.14.

    The euro has been gaining against the U.S. dollar amid expectations of a slowing domestic economy. It was lately trading at $0.9365.

    Tokyo stocks ended slightly higher overnight following a session of profit-taking Monday. The key Nikkei 225 closed up 16.90, or 0.12%, to 13,943.55. Hong Kong stocks rebounded overnight, and the key Hang Seng erased all of the previous days losses plus a couple of points more, closing up 209.28, or 1.32%, to 16,102.35.

    The greenback was lately trading at 116.31 yen.

    For more on world stock markets, check out TheStreet.com's global indices information .

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