Wall St. Buoyed by Hefty Fed Rate Cut
Stocks zigzagged their way to moderate gains Wednesday as investors digested two major developments: the GOP’s victory in Tuesday’s midterm elections and the Federal Reserve’s surprisingly deep cut in interest rates.
“There is a new level of enthusiasm on Wall Street, but the jury is still out on just what the Republican agenda will be,” said Andrew Parmentier, policy analyst at Friedman Billings Ramsey in Arlington, Va.
The Fed’s dramatic half-point interest rate cut, meanwhile, was meant to have a psychological effect, analysts said, noting that rates already were at 41-year lows.
“In front of the holiday shopping season, the message is, ‘Don’t worry, keep spending,’ ” said Mario DeRose, fixed- income analyst at brokerage Edward Jones in St. Louis. Some analysts fretted, however, that the size of the rate cut signals that the Fed has serious doubts about the U.S. economy.
The Dow Jones industrial average surged after the Fed’s announcement, then sank before rallying again to close 92.74 points, or 1.1%, higher at 8,771.01. The broader Standard & Poor’s 500 index gained 8.37 points, or 0.9%, to 923.76, and the tech-heavy Nasdaq composite rose 17.82 points, or 1.3%, to 1,418.99.
Winners swamped losers by 2 to 1 on the New York Stock Exchange and on Nasdaq in heavy trading.
Surprisingly, some short-term Treasury yields finished little changed despite the big rate cut. Analysts had said a quarter-point cut was “priced in” to the Treasury market.
“Investors apparently think this is the end of the line for interest rates,” said Jeffrey Gundlach, manager of the TCW Galileo Total Return fund in Los Angeles.
The yield on two-year Treasury notes rose to 1.83% from 1.81% on Tuesday, while the yield on the benchmark 10-year T-note eased to 4.03% from 4.07%. Very short-term yields were more strongly affected, however, with the yield on the six-month T-bill falling to 1.24% from 1.41%.
Analysts said the election results and the Fed’s move could give Wall Street’s monthlong rally more fuel, bolstering hopes that the 2 1/2-year bear market bottomed out in October. The Dow has gained 20.4% since falling to a five-year low Oct. 9.
Strategists expect Republicans -- who now control both houses of Congress -- to push for tax cuts and other measures perceived warmly on Wall Street, while shying away from business regulation.
Although the economic stimulus of tax cuts would be welcomed by investors, analyst Parmentier said, the GOP might risk raising skepticism if it were to add government personnel -- for example, in funding the homeland security department.
Nevertheless, he said, industry sectors likely to benefit from the GOP’s agenda include brand-name drug stocks, now seen as less vulnerable to price limits; insurers, whose asbestos liability might be capped under tort reform; and oil producers, which could be helped by new domestic production.
Drug stocks jumped Wednesday, including Pfizer, up $1.02 to $33.64; Bristol-Myers Squibb, up $1.12 to $26.99; and Schering-Plough, up $1.02 to $22.40.
Defense stocks, also viewed by analysts as a potential beneficiary of the Republican agenda, rallied as well, including Lockheed Martin, up $1.30 to $54.95; Northrop Grumman, up $3.92 to $100.40; and Boeing, up $2.06 to $33.58.
With its key interest rate now at 1.25%, the Fed has little room to trim rates further, analysts caution, and its 11 cuts in 2001 so far have resulted in a mixed bag of economic data.
“The Fed may not have much ammunition left to address any exogenous shock, be it a recession in Europe or a supply shock in the energy markets,” said Jack Caffrey, equity strategist at J.P. Morgan Private Bank in New York.
Some believe the Fed may have been using its “ammunition” on Wednesday to, in effect, drive investors out of money market funds and into stocks.
The average seven-day money market yield already is near a record low at 1.2%. That rate probably will fall to about 0.75% in the coming six weeks.
“It’s a huge hit for savers,” Gundlach said. “It would seem the Fed is trying to encourage the stock market rally to continue.”
Analysts also caution that the Fed’s unmistakable message was that the U.S. economy still needs help.
“Investors should have mixed emotions about the Fed’s actions,” Caffrey said. “Yes, lower interest rates justify higher valuations on stocks, but if economic conditions are so weak that expected earnings don’t come through, then it’s a different story.”
Although the rate cut could help keep the market’s rally going for a while, he said, once fourth-quarter earnings “confession season” begins this month, investors could get spooked if it appears consumers aren’t spending.
In the currency market, meanwhile, the euro passed $1 for the first time since July, closing at $1.003, up from 99.9 cents Tuesday, as the greenback slumped.
Market Roundup, C7-8
