Don't fight the
Or so the old saying goes on Wall Street, though from the noise we heard on Friday, plenty of people were trying pretty aggressively to do just that. Rumors flew through the market that the fed funds and discount rate cuts
pointed out, there could be something to Fed conspiracy theories. (The one about the
Federal Open Market Committee
dressing in 16th-century Venetian court dress probably isn't true, though. Really.) But it is perhaps more likely that unscrupulous types were finding ready ears in a market still baffled by the intermeeting cut and distracted by the double-witching expiration of stock and index options.
One of the themes for the coming week will be the degree to which such rumors are able to affect the market. In recent trading, investors have begun to get a bit less gun-shy, or shoe-drop-shy, or some such thing. The farther we get from the
Long Term Capital Management
disaster, the more trouble in other places (
) seems to be contained, the chances that there will be another run for the exits diminishes.
The notion that Wall Street's fears are behind it has prompted strategists to view the market more favorably. Encouraged by the rate cut and the movement of the yield curve to a more pleasing shape,
Morgan Stanley Dean Witter
chief U.S. investment strategist
told his firm's sales force Friday morning that he believed stocks have rounded the bend, that he would be a buyer, not a seller, of the rally. And Wien, like nearly everyone else on Wall Street, believes that there are more cuts to come.
But the degree to which the Fed will cut, and when, is somewhat up in the air. While most Fed watchers believe the Fed will cut Nov. 17, there is a slight possibility that there will be another intermeeting cut. If Fed honchos see conditions deteriorating, said Roseanne Cahn, economist at
Credit Suisse First Boston
, "they'll do whatever it takes."
Because the Fed has cut rates in response to stress in the credit markets, Cahn is paying more attention to credit spreads than to the usual economic reports. She notes that the pressure that both credit spreads and stocks have seen appears to have alleviated somewhat, a sign that the crisis may have passed its most acute point.
"My guess is the Fed will want to see more than a little improvement in these measures," she said. "In the next month we probably won't get more than a little improvement in these measures, so I think we get another ease on Nov. 17."
Looking longer term, beyond the there's-another-LTCM-
out-there-no-there-isn't debate, the argument going on in the market is now about whether the Fed's action will be enough to stave off trouble for the U.S.
Shawn Johnson, director of research at
State Street Global Advisors
, points out that there is very little gray area on the Street these days. "You either think we're going into a global recession or you think we're going to pull out of it," he said. "There isn't a lot of intermediacy. The points of view in the capital markets are so different, that points to volatility. I think 1998 will be remembered as the year of volatility."
Though Johnson remains cautiously positive on the market going forward, others are less sure.
strategist Lisa Cullen points out that while there is "certainly a more constructive environment now that the Fed is in an easing mode," earnings remain a worry. Though the market has been responding well to "positive surprises," third-quarter earnings for the
will likely show a decline of 1% from the year-ago period, according to
. It will be the third quarter of an earnings-growth recession, and perhaps the first of an earning recession.
"With the S&P roaring back, we're looking again at
price-to-earnings ratio levels in the mid-20 range," Cullen said. "That seems not to be justified given what's happening on the earnings front."
Those hearty valuations in big-caps could be a sticking point for small-caps, said Claudia Mott, small-stock strategist at
. The rate cut "creates a much more positive scenario going forward," said Mott. "Better domestic growth is more likely to filter quickly into the small-cap names. My only concern is, a lot of the big-cap stocks are pretty expensive. If anything causes them to correct, small-caps will suffer."