What Fed Interest Rate Cuts Have Meant for the Markets

The Murky Market: Searching for a Bottom

What Fed Rate Cuts Have Meant for the Markets

Sentimental Journey: Indicators Give Mixed Messages

Technical Difficulties: Technical Analysts Use Different Barometers, Find Different Results

Bull vs. Bear: A Daily Interview Face-Off

The 'Other Market:' Some Tech Stocks May Not Have Seen the Floor Yet

Is It Time to Put 'Play Money' to Work?

If Now, Then How: The Right Way to Get Back In

One True Thing: Money Market Funds

As the Federal Reserve kicks the economy in the pants by slashing interest rates, many investors have watched their portfolios sink to depressingly low levels. Even though markets have historically jumped an average of 20% in the 12 months after a rate cut, no such upswing has been seen this time around -- yet.

The advice from long-time market watchers? Be patient. Unlike the whiz-bang, growth-fueled Nasdaq rallies of 1999 and early 2000, a recovery from the brink of a recession takes time.

Technically speaking, lower interest rates help companies in fundamental ways. Money is cheaper and companies can therefore buy new equipment, hire new employees and do whatever else they need to increase business. But not every recovery is the same.

In October 1987, the market collapsed as a result of high interest rates and upheaval in the currency markets. The Fed rushed to cut rates, dropping the fed funds rate 75 basis points in four months. But the S&P recovered only about 14% -- not the 20% that has historically been the case.

"The reality is that every cycle is different," says Bill Cheney, chief economist at John Hancock Financial Services. "I remember back in 1987 everyone was corresponding that to 1929 and saying, 'Here's the big crash!' And there wasn't. We're liable to overdo the historical parallels."

The Fed Effect In some cases, the Fed has been effective at stimulating the market with rate cuts, but not always.

Source: Yardeni.com

Cheney and other market watchers feel investors should focus on sniffing out good companies, stressing discipline and patience over faith in some historical tendency.

"It's a dangerous time to be complacent," says Phil Dow, the director of equity strategy at Dain Rauscher. Dow got his start in the market in 1971, and in his early years saw skyrocketing gas prices, high inflation and the Watergate scandal. Back then, the S&P 500 was below 100 and the vigilant Fed hacked at rates, cutting them from 9% to under 4% from 1969 to 1972 -- a massive 500 basis points, and the market still refused to budge.

"I got my teeth knocked out," says Dow. "It took 15 years for the market to really come back."

While Dow doesn't think it will take that long for the current market to recover, he was loath to make a specific prediction on the S&P's performance in the next 12 months. He acknowledged, though, that the Fed cuts should help the economy rebound, especially when the tax relief promised by the Bush administration is factored in.

According to John Hancock's Cheney, technology has sped up the market, forcing the Federal Open Market Committee to act faster and with a greater degree of depth than ever before. The pair of 50 basis-point cuts in January were unprecedented -- a bold move from the central bank, which didn't move that fast when it took a full five months to drop the rate that much in 1989.

But even though the Fed took two giant steps forward, stock prices took two giant steps back last month. The Dow Jones Industrial Average finished to the upside only five times over this span, as the Comp slid to 28-month lows, turning the clock back to 1998. Salvation has been in short supply as buyers have dashed to safety on the sidelines.

But don't be afraid. Big winners buy in at the worst time and cash out when everyone else plays catch-up.

"If you bought stocks halfway through 1987, you looked like a complete idiot," said Tony Dwyer, chief market strategist at Kirlin Holdings. "But two years later, you were a genius."

The pros, like Dwyer and Dow, tell investors not to bet on the market. They should invest and stick to their guns when buying stocks. That is, only after they've done their homework. Focus on company earnings. Focus on revenue. And don't trade stocks for no reason; hold them and get serious about it.

"Own 100 shares as if you own the entire company," says Dain Rauscher's Dow, who sheepishly admits that he isn't a very good short-term trader. "Look at the president's letter. Every president's letter tells you what the company goals are. And if they don't come through on those -- sell the stock -- it ain't rocket science."

If history gets a vote in the eternal debate between bears and bulls, then things will get better. But please, don't count on Greenspan alone.

"His job is not to turn the stock market around," Dow says. "People are all wet if they think that Alan Greenspan can control the stock market. It's more than just him."