Market Bounces Back From Steep Losses on Rate Cut Speculation


Sudden speculation that the Federal Reserve might move up its next interest-rate cut helped the stock market rebound from another drubbing Friday and saved the benchmark Standard & Poor’s 500 index from closing in bear-market territory for the first time in more than a decade.

The market closed well above its lows of the day--and the beleaguered, technology-laden Nasdaq composite index even managed its first gain in five sessions--after economists at Bear Stearns & Co. said it’s “highly likely” that the central bank will cut rates next week.

The Fed already has trimmed rates twice this year, and its policy-making committee isn’t scheduled to meet again until March 20. But increasing concern that the economy’s slowdown is worsening could prompt another cut before then, the economists said.


Investors quickly embraced that notion to bid stocks higher. The Dow Jones industrial average slashed a 232-point intraday loss to end the day down 84.91 points, or 0.8%, at 10,441.90. The Nasdaq composite index turned an 89-point drop into a gain of 17.55 points, or 0.8%, to 2,262.51.

The Bear Stearns report came just in time to spare the S&P; 500 index from closing 20% below its peak of 1,527.46 reached last March 24--a percentage drop that many define as a bear market. The index, the basis for the S&P; 500 index mutual funds held by millions of investors, closed with a 6.96-point loss, or 0.6%, at 1,245.86, leaving it down 18% from its high.

Hopes for a Fed rate cut also cheered bond investors. Bond prices rose, and the yield on the benchmark 10-year Treasury note--a key indicator of the direction of interest rates--fell to 5.09% from 5.15% Thursday.

But whether investors’ enthusiasm about another rate cut will hold up is a wide-open question, analysts said.

Increasingly dispirited by the economy’s slowdown and gloomy profit forecasts from Corporate America, investors already have largely ignored the central bank’s two earlier rate cuts this year, killing modest rallies.

Tech giants Sun Microsystems and Motorola on Friday were the latest to dampen investors’ spirits as they, too, predicted sharp slowdowns in the face of the braking economy. Sun closed unchanged at $20.81, but off 23% for the week. Motorola lost $1.04 to close at $16.25.


That pushed many computer and telecommunications stocks even lower, including Dow component IBM, which fell $4.90 to $104, Finnish telecom giant Nokia, which lost $1.91 to $21.34, and software maker Oracle, which hit a 52-week low on the way to closing at $22, down $1.38.

But the casualties were widespread. Financial stocks, especially brokerage firms, also fell. Brokerage Morgan Stanley Dean Witter dropped $1.93 to $67 while Dow member Citigroup fell 40 cents to $48.20. Also down were many entertainment, capital-goods, transportation and retailing stocks. But biotechnology stocks rose.

Even analysts with long-term bullish outlooks for the market conceded that, until there’s some spark that rekindles investors’ optimism, stocks could continue to tumble. Another rate cut by the Fed, or a series of surprise positive corporate earnings announcements, might do the trick and set the stage for a “bottom” to the market’s slide.

But no one knows if or when that will happen.

“The herd right now is so fixated on the near-term dynamics [of the market] and we need a change,” which might be the Fed’s action if it actually does cut rates, said Brian Belski, fundamental market strategist at US Bancorp Piper Jaffray in Minneapolis.

“We won’t see a bounce until people stop worrying about where the market’s going to land,” he said. “When you’re asking yourself every day, ‘Is this the bottom?’ you have an itchy trigger finger [to sell].”

The S&P;’s flirtation with bear-market territory is a cause for concern, analysts said. It’s an artificial milepost, to be sure, but for the S&P; 500 to end a trading session with a 20% loss from its high--which hasn’t happened since late 1990--is important because it could exacerbate the negative psychology that’s already pervasive among investors.


The Nasdaq composite index has been in a bear market for months, and remains 55% below its peak of 5,048.62 reached last March 10.

Indeed, Bear Stearns analysts--who include chief economist and former Fed governor Wayne Angell and its senior economist John Ryding--cited Nasdaq’s woes as one reason they expect the Fed to cut short-term interest rates.

“The decline in the Nasdaq likely points to a further sharp decline in consumer confidence--an indicator that Fed Chairman Alan Greenspan has elevated to being a major input to Fed policy,” the economists said in a bulletin to their firm.

About three stocks fell for every two that rose on the New York Stock Exchange, where trading was active. On Nasdaq, where 2.2 billion shares changed hands, 17 stocks for rose every 21 that fell.

Market Roundup, C4