Markets Rise on Fed’s Latest Rate Cut
The Federal Reserve’s latest interest rate cut got a delayed but enthusiastic reaction Tuesday on Wall Street as stocks soared in the final hour, after spending most of the day in a holding pattern.
For investors, the choice between keeping savings in cash and putting it into stocks will get tougher soon: Money market mutual fund yields are likely to fall below 2% with the latest Fed cut, experts say.
“The Fed is, in a nice way, trying to make it as painful as possible to hold cash,” said Chris Orndorff, head of equities at money manager Payden & Rygel in Los Angeles.
The technology-heavy Nasdaq composite index gained 41.43 points, or 2.3%, to 1,835.08, bringing its advance since Sept. 21 to nearly 29%.
The Dow Jones industrial average surged 150.09 points, or 1.6%, to 9,591.12, and the Standard & Poor’s 500 rose 1.5%.
Winners topped losers by 2 to 1 on the New York Stock Exchange and by 21 to 15 on Nasdaq. Trading was heavy.
Orndorff is among many investors who already have been shifting cash holdings into stocks--an important factor in the powerful market rally since the terrorist attacks.
In the last week, Orndorff said, he moved his institutional portfolios to a “fully invested” position in stocks, cutting his cash stake from 10% of assets to virtually zero.
He said the U.S. Treasury’s stunning move last week to stop issuing 30-year bonds, combined with the Fed’s aggressive credit-easing, “provides the one-two stimulus punch the economy needs” to begin recovering.
The huge mountain of cash on the sidelines could help fuel stocks’ rally, if more investors turn bullish.
Money market fund assets have surged by $620 billion since April 2000, lifting the total in the funds to $2.27 trillion, according to the Investment Company Institute. The fund total includes short-term savings of individuals and of companies and institutions.
The average seven-day money fund yield, now at an annualized 2.23%, could fall to 1.7% by year-end as the Fed’s latest rate cut works its way through the system, said Connie Bugbee, editor of Money Fund Report newsletter in Westborough, Mass.
“If you are thinking of going into equities this [rate cut] is certainly going to give you another nudge,” she said.
Orndorff cautioned that while he expects a “pretty decent rally” in stocks over the next six months, “it won’t be anything like the late 1990s.”
He said he has bought health care and consumer stocks but has steered clear of companies dependent on capital spending, such as major technology names, which he expects to lag in the economic recovery.
Some mutual fund companies say there are signs that the hoard of cash in money funds is beginning to flow from there to stock funds as the bulls hold sway on Wall Street.
With so much cash in money funds, even a relative trickle could boost the equity market, analysts say.
At T. Rowe Price Group in Baltimore, money came back into equity funds in October, in part because investors were turned off by sagging yields on money funds, company spokesman Steve Norwitz said.
Some investors yanked cash from the firm’s stock funds and poured it into safe money funds after the Sept. 11 terrorist attacks.
That intensified a yearlong pattern in which many weary stock investors sought shelter in money funds.
Through September, T. Rowe Price’s inflows into money funds were more than twice their level of the year-earlier period, Norwitz said.
But that pattern reversed in October, and the trend has continued so far this month, he said.
“If you’re getting 2.5% or 3% yields on your money-market fund people realize they’re not going to achieve their [long-term financial] objectives,” Norwitz said.
Still, experts warn that the stock market could get ahead of itself in anticipating an economic recovery in 2002. And share prices could be subject to sharp reversals in the next few months if it appears that the economy could decline throughout 2002, they say.
Among Tuesday’s market highlights:
* Major tech stocks rallied on hopes that interest-rate cuts will help spur more capital spending. Microsoft rose $1.51 to $64.78, Intel added $1.29 to $28.25 and Cisco Systems climbed 57 cents to $18.47 after reporting better-than-expected earnings late Monday.
* Financial stocks rallied on anticipation of more consumer and corporate borrowing. J.P. Morgan Chase climbed $1.18 to $37.54 and Wells Fargo rose $1.52 to $42.40. Brokerage stocks also inched up.
* Many energy stocks lost ground as slowing demand drove crude oil to a two-year low. Royal Dutch Petroleum dropped 75 cents to $50.45 and ChevronTexaco slid 31 cents to $86.80.
* Retailers continued to rebound. May Department Stores rose $1.35 to $35.24, Kohl’s jumped $1.17 to $60.50 and Toys R Us surged $1.68 to $22.10.
But 99 Cents Only Stores fell $2.27 to $33.97. The company said that investors including the Gold family sold 2.078 million shares in a block trade to institutional investors.
* Health insurance stocks were strong. Cigna gained $2.58 to $83.49, WellPoint Health rose $1.90 to $115.20 and Oxford Health jumped $2.33 to $27.23.
* Mandalay Bay Group surged $2.03 to $19.08 after the casino operator said earnings in the quarter ended Oct. 31 will beat expectations. Also gaining were MGM Mirage, up $1.56 to $24.20, and Harrah’s Entertainment, up 89 cents to $31.16.
* In foreign trading, key indexes rose 1.8% in Japan and 2% in Brazil, but were mixed in Europe, rising 0.1% in Britain and falling 1% in Germany.
