It's All Good to This Tape

The "big" news Tuesday was the Federal Open Market Committee's meeting. The bigger news is the stock market rallied again, despite the Fed's admittance that the economic risks are tilted toward the downside. Or maybe stocks rallied because of it?

Either way, it seems the equity market is in one of those periods in which all news is good news. Better-than-expected results after the close from Cisco ( CSCO) are likely to further the momentum on Wednesday, at least in the early going.

Tuesday, major averages hit their session highs shortly after the 2:15 p.m. EDT release of the Fed statement. The central bank left rates unchanged, as expected, and traders apparently determined prospects for further rate cuts implied by the risk-assessment statement were yet another reason to buy shares. Stock proxies did fade from those highs but rallied again in the final hour to finish with decent gains.

After trading as high as 8641.22 at about 2:45 p.m. EDT, the Dow Jones Industrial Average closed up 0.7% to 8588.36. The S&P 500 finished higher by 0.8% to 934.39 vs. its intraday best of 939.61 while the Nasdaq Composite closed up 1.3% to 1523.70 vs. its apex of 1531.80.

Trading volume was heavy, with 1.6 billion shares exchanged on the Big Board and 2.1 billion in over-the-counter trading, a 2003 high mark for the Nasdaq.

Today's close was the S&P's highest since Dec. 2, 2002, although the index failed to sustain an intraday move above its Jan. 13 intraday peak of 935.06. Preceded by the March highs near 900, those January highs are additional technical obstacles some traders were (and are) awaiting to be surpassed before becoming comfortable with the long side.

As reported Monday, some won't be convinced a "new bull market" has begun until the S&P's August highs around 954 are exceeded, while more finicky observers will withhold optimism until the all-time highs above 1500 are breached. Those folks may be technically correct. But the bottom line is a lot of gains will have been left on the proverbial table for anyone waiting for those "confirmation" signals, most especially the all-time highs.

To be clear: I don't expect to see S&P 1500 anytime soon. But whatever you call it -- new bull, cyclical rally within secular bear, sucker's rally, etc. -- the stock market's trend is up and remained so Tuesday.

Treasuries rallied Tuesday in reaction to the Fed announcement after struggling early following poor demand for the three-year note auction. The benchmark 10-year note ended up 24/32 to 100 22/32, its yield falling to 3.79%.

"It's the best of all worlds -- steady to slightly lower interest rates and higher equity prices," said William Sullivan, senior economist at Morgan Stanley, of the market's reaction to the Fed's announcement.

As reported earlier, the outcome for the dollar was less constructive with the greenback slumping to another four-year lows vs. the euro, which surpassed $1.14 for the first time since January 1999. Sullivan, among others, believes a weakening greenback is precisely what the Fed wants.


Meanwhile, by stating the risks are weighted toward economic weakness, the FOMC seemed to disagree with the largely optimistic view offered by Fed Chairman Alan Greenspan in last week's congressional testimony.

To be sure, Tuesday's statement acknowledged Greenspan's oft-stated optimism about the potential for an economic rebound once geopolitical uncertainties lessen, as has been the case in recent weeks. "The ebbing of geopolitical tensions has rolled back oil prices, bolstered consumer confidence, and strengthened debt and equity markets," the statement declared. "These developments, along with the accommodative stance of monetary policy and ongoing growth in productivity, should foster an improving economic climate over time."

However, the FOMC admitted "the timing and extent of that improvement remain uncertain," unwittingly confirming what Greenspan's critics have long noted: This is starting to become a "central bank that cried wolf story."

If the economy doesn't show signs of recovering -- and relatively soon -- the equity market might start to fret about this persistently unfounded optimism about future growth, much less the dollar's unraveling. For now, however, the stock market isn't too concerned about very much.

On the other end of the spectrum, some market participants still believe the Fed is grossly underestimating the threat of inflation.

"I was pleased with the lack of action but a little disturbed about their pessimistic slant," said Bill Tedford, who manages about $600 million as director of fixed income strategy at Stephens Capital Management in Little Rock, Ark. "I do not want to see them force the funds rate down from here."

Tedford, long concerned about seemingly stealth inflationary pressures, noted the nation's monetary base grew by a compounded rate of 8.3% in the past two years. The monetary base, a crude measure of money supply, is roughly defined as the sum of currency in circulation plus central bank reserves.

Meanwhile, the Consumer Price Index was up 2.3% for the 12 months ended March while the Cleveland Fed's median CPI was up by 3%. By either gauge, the 1.25% fed funds rate is thus negative, or "upside down," as Tedford described.

"I'm hoping by June they'll have decided whatever those risks are didn't work out," he said. "We've had enough time of low rates."

Having said that, Tedford admitted the Treasury market doesn't seem too concerned about inflation right now. As the benchmark 10-year note rallied further, yields on comparable Treasury Inflation Protected Securities, or TIPS, are yielding only slightly above 2%, down from 3.5% a year ago, the fixed-income manager noted.

Gold, often viewed as an inflation hedge, albeit an imperfect one, rose 0.6% to $344.90 per ounce Tuesday while the Philadelphia Stock Exchange Gold & Silver Index rose 0.6%.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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