SAN FRANCISCO -- A once-inconceivable notion has begun gaining widespread acceptance in the past few weeks: The 275 basis points of Federal Reserve rate cuts in 2001 have failed to revive either the economy or the stock market.
TheStreet.com has been
documenting the Fed's
inability to spur a rebound for some time. But it's not "news" until
The New York Times says so, which it did yesterday with a piece entitled, "The Federal Reserve Finds the Limits of Its Power."
That's not meant as a knock on
the Times. The point is that when journalism's Gray Lady does a story like that it's very likely the mass market news outlets will pick it up. Don't be surprised if one of the network TV news magazines or major weekly news magazines has a major story or segment entitled "Fed Failure" or "The Maestro Is Out of Tune" in the coming days or weeks. That will help cement the notion of the Fed's fallibility in the nation's consciousness.
Criticism of the Fed and chairman
Alan Greenspan is not new. Many investors (and some Congress members) blame the central bank for "choking off" the economy and the stock market with overreaching rate hikes in 1999 and early 2000.
Still, the "Don't Fight the Fed" mantra has been widely touted by market participants this year, and provided solace to many investors that things will get better. Fed easing is still viewed by some as a panacea for the market's ills, and Greenspan testified that the rate cuts are having the desired effect.
But with the "second-half recovery" scenario being continually pushed further out -- well into 2002 by some observers -- a growing number of market participants are beginning to question the Fed's effectiveness. That is a relatively new development with potentially far-reaching implications.
From the onset of this column's
critiques of Greenspan, I have argued that a grave threat to the financial markets is the possibility of investors losing faith in Greenspan. On
Feb. 23, I wrote: "While I applaud Greenspan for admitting his fallibility [in forecasting the economy], I have to wonder why so many investors still see him as an all-knowing deity. I also wonder how much longer that perception can last."
It appears "less than six months" is the answer.
Contrarian's Delight
On the other hand, as more investors lose faith in the Fed, there's that much greater opportunity for an "upside surprise" -- at least in the short term.
A substantial rally driven by contrarian forces is the current forecast of Dave Hunter, chief market strategist at
Kelly & Christensen, a small brokerage firm on the floor of the
New York Stock Exchange.
"On balance, it appears that investors are quite bearish at present, which causes this contrarian to consider whether stocks just might be ready to deliver some better performance," Hunter wrote in a report yesterday.
Bullish sentiment may have risen again in the latest
Investors Intelligence survey, but Hunter believes "investors are quite bearish," based on the
Arms Index and the record high level of short interest. (The Arms Index measures the ratio of advancing stocks vs. declining stocks by the ratio of up volume vs. down volume.)
"The market may be on the verge of a strong summer rally," Hunter forecast. "With so much institutional money on the sidelines and the crowd all waiting for the same thing, you could get a 'train leaving the station' rally that heats up rather quickly."
Perhaps that train started heating up today, because stocks rallied despite -- or because of? -- fears that yesterday marked a
technical breakdown. The
Dow and
S&P 500 each rose 1.6% and the
Nasdaq Composite climbed 1.3% today.
Hunter believes the upward trend will continue, taking the Comp to as high as 2500 and the Dow to near 12,000 by Labor Day.
Hunter is new to this column and probably unfamiliar to many readers. I've had a long-running email exchange with the strategist and include his views tonight because they represent a reversal of his previously expressed bearishness. Bears turning bullish is usually a "good" sign for the market.
However, note that Hunter "remains unconvinced that any economic rebound will be sustainable" and remains skeptical about the market's long-term prospects. But with expectations falling and faith in the Fed waning, "any signs that the economy is turning could spark a significant rally," he said.
Tax-rebate checks spurring a stronger-than-expected "back to school" shopping season is one potential catalyst for Hunter's scenario. Another is that the advance look at second-quarter
GDP due Friday comes in ahead of the 0.9% consensus.
"The risks against our estimate have now swung to the upside,"
Goldman Sachs' economics group commented yesterday. "A 1% or slightly higher figure would not be at all surprising, whereas a flat or negative one seems quite unlikely."
Goldman, which maintains a 0.5% forecast, suggested
Commerce Department officials have "some flexibility" with the data. The big disparity between the April and May trade balance figures, and the fact second-quarter GDP accompanies the annual revisions to the national income and product accounts, "gives them a good deal of leeway."
If the GDP is stronger than expected, some will no doubt accuse the government of massaging the data (which others say is standard practice). But from a practical perspective, any sign of life in the economy could trigger a short-term rally.
More especially now that investors have taken Alan Greenspan off the high horse.
Aaron Task
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