When the stock market rallied impressively in April and early May, investors piled in on the notion that Federal Reserve interest rate cuts would lift the economy in the latter half of the year.
But with the second half about to begin, much of the spring enthusiasm has drained out of Wall Street. Now, many investors are clustered on the sidelines, waiting to see whether a rebound actually develops.
The cautious mood was evident Wednesday as stocks barely budged after the Fed's latest rate cut. The Dow Jones industrial average slipped 37.64 points, or 0.4%, to 10,434.84, while the Nasdaq composite index eked out a gain of 10.12 points, or 0.5%, to 2,074.74. Trading was moderate.
The quarter-point cut in the Fed's key short-term rate to 3.75% was smaller than the half-point drop that some people had expected. But the size of the move had little to do with the stock market's lackluster response, experts said.
In fact, some argued that stocks wouldn't have surged even if the central bank had cut rates by a half point for the sixth time this year.
Rather, after six months of one of the most aggressive rate-cutting campaigns in Fed history, investors are looking for unmistakable evidence that the economy has turned and that deeply depressed corporate profits are poised to bounce back.
"In the first half, it was, 'Why not? I'll take a chance [and buy stocks],' " said Thomas McManus, market strategist at Banc of America Securities. "In the second half, it'll be much more, 'Show me.' "
Though the economy recently has flashed conflicting signals about its condition, some analysts are convinced that a recovery will be underway by the fourth quarter.
That gives market bulls such as Goldman Sachs Group strategist Abby Cohen confidence to project sharply higher share prices by year-end. Cohen expects the Standard & Poor's 500 index to reach 1,550 by Dec. 31, which would be a 28% gain from Wednesday's close of 1,211.07.
Yet the news on the corporate front has continued to verge on dismal. Technology giants Intel Corp. and Oracle Corp. have issued mildly comforting forecasts in the last month. But for much of corporate America, disappointing profits and downbeat projections have been the rule. On Tuesday, for example, brokerage Merrill Lynch surprised analysts by revealing that second-quarter profit would fall far short of estimates.
"The problem is that, as yet, we do not see any light at the end of the tunnel," said Hugh Johnson, chief investment officer at First Albany Corp.
Johnson, like many others, believes that positive news will emerge by the fall or early winter. He expects that, by the end of the third quarter, many tech companies will report that the plunge in orders has ended, a critical first step toward a recovery. That could spark a year-end stock rally, he said.
But even if the economy begins to resurrect itself in the second half, that doesn't guarantee an accompanying jump in sales and profits for companies across the board, some analysts warn.
Many investors, in fact, fear that corporate earnings growth will be halting well into 2002.
Consumers have kept spending at a decent pace this spring, but many retailers say they have had to discount heavily to move goods, crimping profit margins.
What's more, businesses that have slashed their outlays for technology and other capital equipment are unlikely to dive quickly back into major projects, economists warn.
The ace card for the economy is that the Fed can trim interest rates further. In its official statement Wednesday, the central bank left the door open for more cuts.
Even so, lower rates may not do much for the stock market in the near term, experts said, because the Fed's accommodative stance already is reflected in stocks' bounce since early April.
The S&P; 500 is up 9.8% from its two-year low reached April 4, though it's down 8.3% year to date. The Nasdaq index is up 27% from its early-April low, but is still down 16% for the year.
On Wednesday, stocks were modestly higher early in the day, fell after the Fed's announcement, then pulled up again.
What the Fed said Wednesday "wasn't a reason to sell stocks or to buy them," said Richard Cripps, chief market strategist at brokerage Legg Mason Wood Walker in Baltimore.
With many stocks still selling for relatively high price-to-earnings ratios, the best-case scenario may be for the market's choppy pattern of the last few weeks to continue, some say.
Even some Wall Street bulls concede that the market has no clear leadership at the moment--meaning no strong sector to help pull share prices broadly higher.
Small-cap and mid-cap stocks are generally in favor over large-cap stocks. But there is little consensus about which groups will lead the market in the next six to 12 months.
Cripps, for example, likes certain financial stocks, such as banks, that usually benefit from falling interest rates.
But Jon Brorson, director of stocks at the Northern Funds mutual fund group, said investors are rotating among sectors and not staying in any one in particular--a sign of a lack of conviction.
Market Roundup, C7-8
The Fed: The central bank trims key rate a quarter point. A1
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The Fed Effect: Starting to Kick In?
Stocks tumbled in the first quarter despite the Federal Reserve's interest rate cuts. In the second quarter the market appeared to respond to the Fed's stimulus, but the latest rally, too, has faded.
Source: Bloomberg News