Stocks Rally on Expectations of Another Rate Cut
The stock market Monday followed through on Friday’s midday rebound, as shares closed broadly higher amid growing expectations for another Federal Reserve interest rate cut soon.
The Dow Jones industrials surged 200.63 points, or 1.9%, to 10,642.53, while the Nasdaq composite index jumped 45.99 points, or 2%, to 2,308.50.
In the Treasury bond market, rates fell sharply, leaving yields on key securities at two-year lows.
Stocks had rallied dramatically on Friday, recovering much or all of their morning losses, as rumors spread that the Fed would make a surprise cut this week in its benchmark short-term interest rate, now at 5.5%.
Wall Street has definitely talked itself into a rate cut before the Fed’s next official meeting March 20, said Donald M. Selkin, market strategist at Joseph Gunnar & Co. in New York. He cited as evidence that stock and bond markets have rallied together the last two trading sessions, an infrequent occurrence lately.
Indeed, the yield on the one-year T-bill--which is particularly sensitive to expectations for Fed rate moves--fell to 4.52% Monday from 4.61% Friday. It now is the lowest since early 1999.
But the markets’ seeming demand for an immediate rate cut puts Fed Chairman Alan Greenspan in a potentially tricky position, Selkin said.
A much-awaited economic signal, the Conference Board’s consumer confidence index for February, is due for release today. Most Wall Streeters expect the indicator to show a continued decline.
However, if the index should rise or show little change and if the Fed refrains from cutting rates today, Greenspan could be in for strong criticism Wednesday when he appears before a House committee, Selkin said. The stock market, meanwhile, could sell off sharply without a rate cut.
Several analysts attached great significance to the fact that a Fed spokesman said Monday that in preparation for his House appearance, Greenspan has updated the text of remarks he delivered to a Senate committee Feb. 13.
Former Fed Gov. Wayne M. Angell, now an economist at Bear Stearns Cos., said Monday that he views the chances of an interim rate cut at 80%, up from the 60% odds he gave the move last Friday.
If Thursday’s report by the National Assn. of Purchasing Management shows continuing weakness in the manufacturing economy, then the Fed’s hand may be forced, said Richard Cripps, equity strategist at Legg Mason in Baltimore.
However, the economic signals lately have been quite mixed, he added, noting that federal withholding taxes are up sharply and certain retail sales figures are strong. “How does that happen in a recession?” Cripps asked.
Rather than an impending rate cut, he thinks the stock market’s strength of the last few days has been sparked by investors bargain hunting and perhaps starting to smell a turnaround, rate cut or no rate cut.
Bear markets since 1950 have averaged 13 months in length, he noted. If the current bear dates to last March 24, when the Standard & Poor’s 500-stock index peaked, then we might be only a month or so away from a bottom.
Cripps noted that many stocks have been advancing this year, even though the crash in tech stocks has stolen the spotlight.
On Monday, winners topped losers by 22 to 9 on the New York Stock Exchange and by 24 to 13 on Nasdaq. Volume was moderate.
Tech stocks, said Cripps, are “one-quarter of the market and three-quarters of the discussion.”
Among Monday’s highlights:
* Interest rate hopes lifted many “old-economy” stocks in the Dow, which had finished down 87 points Friday despite the rally late in the day. Winners included DuPont, up $2.49 to $44.52; GM, up $2.54 to $55.55; drug giant Merck, up $2.25 to $79.33; and Citigroup, up $2.10 to $50.30.
* Many retail stocks rebounded after slumping last week. Home Depot surged $3.74 to $43.75, Federated Department Stores gained $1.56 to $45.71 and Target gained $2.06 to $37.80.
* Health maintenance organization stocks resumed their rally. Wellpoint Health surged $5.96 to $97.75 and PacifiCare jumped $2.94 to $39.81.
* The tech sector was mixed. Computer chip stocks and networking issues remained weak. PMC-Sierra slid $5.38 to $44.46, Broadcom lost $6.44 to $63 and Cisco Systems fell 94 cents to $26.06.
But Microsoft jumped $2.81 to $59.56 and Ariba gained $2 to $19.69.
*
Market Roundup: C11, 12
