Hope of Fed action gives lift to markets

Economists urge rate cut

Dow climbs 230 points

August 07, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

A growing belief that the Federal Reserve Board will attempt to rescue the limping economy by cutting interest rates drove the Dow Jones industrial average to a 230-point gain yesterday, snapping a string of three straight triple-digit losses.

The Dow surged at the opening bell and at one point in the afternoon had risen more than 368 points, making up more than half of the 692 points it lost during its past three days of operation. But the index of 30 blue-chip stocks faded in the last half-hour of trading to close with a gain of 230.46 points, or 2.87 percent, at 8,274.09.

A number of economists are urging the Fed, which next meets Tuesday, to make a cut, though the federal funds rate - the rate that banks charge each other on overnight borrowings - is at 1.75 percent, a 40-year low.

"While the Fed does not directly target either the stock market or the credit market, it cannot ignore the growing risk of major collateral damage to the economy," said Lehman Brothers economists Ethan Harris and Steve Slifer in a report released yesterday titled "No Mas - The Case for a Fed Easing."

The two urged the Fed to bring the federal funds rate down to 1 percent with quarter-point cuts next month and in November and December.

James W. Paulsen, chief investment officer at Wells Capital Management in Minneapolis, agreed that more cuts are needed, but he said the Fed should make one large reduction to jolt investors and restore confidence.

"I don't think it will be a quarter [percentage point cut], I think it will be a big, honking three-quarters or 1 percent [cut]," Paulsen said. "I think the Fed is saying, `We've got one bullet left.' In some sense, that policy isn't to make credit cheaper, it is to restore confidence that things are going to get better. If [the Fed] can do that, people are going to hire and create income."

Some unimpressed

Though all the major Wall Street indexes boasted significant gains yesterday, the rally didn't impress everyone.

"I'm not buying on this," said Clarence W. Woods, chief equity trader at Allied Investment Advisors in Baltimore. "We don't feel that there is any catalyst at this point to cause the market to go up. We just don't think that the underlying technicals can support a sustained, long-term rally at this point."

The broad benchmark Standard & Poor's 500 index jumped 24.97 points, or 2.99 percent, to 859.57. The Nasdaq composite index, which is loaded with large technology stocks, rose 53.54 points, or 4.44 percent, to 1,259.55 points.

For the year, the Dow is down 17.44 percent; the S&P 500 is off 25.13 percent; and the Nasdaq is down 35.42 percent. The indexes are facing their third-consecutive losing year after racking up huge gains in the late 1990s.

Trading was moderate on the New York Stock Exchange with volume totaling 1.53 billion shares. Advancing issues led stocks that declined by 3-to-1.

In addition to the talk of the Fed reducing interest rates, analysts said a number of factors drove stocks higher yesterday, including strong stock market gains overnight in Europe, a strengthening dollar, little negative news and short-sellers buying stocks to reduce losses.

The economy's health has quickly become the most important topic in business, experts said. More economists are worried that the country could stumble into another recession after emerging from one eight to 10 months ago.

"The big issue out there ... is not terrorism, it is not corporate governance, it is really the economy," said Mickey Misera, head of equity capital markets at Wachovia Securities Inc. in Baltimore. "The other issues are important, but what people are most riveted to ... is the economy."

Charles A. Knott, chief investment officer of Knott Capital Management in West Chester, Pa., said he is worried about a double-dip recession and believes the market and economy are caught in a Catch-22.

"The stock market is destroying wealth, which hurts consumer confidence, which hurts consumer spending, which hurts [corporate] earnings ... which hurts the stock market," Knott said. "You have the vicious circle."

Thinking big

Knott isn't sure if the stock market has reached bottom, but he is picking stocks that are large and pay dividends.

He recently picked up Royal Dutch Petroleum and is weighing a purchase of Exxon Mobil Corp. shares. He also likes real estate investment trusts and lower-end restaurant companies that include Ruby Tuesday Inc., Bob Evans Farms Inc. and CBRL Group Inc., which operates the Cracker Barrel chain.

"A lot of those restaurants were beaten up after 9-11," he said.

Joseph V. Battipaglia, chief investment strategist at Ryan, Beck & Co. LLC of Livingston, N.J., is more optimistic and said that the stock market isn't far from starting a rebound.

"I personally think that we have had the massive bear market, we have corrected the excesses, now you are positioning yourself for the next leg of a bull market," Battipaglia said.

Investors need confidence, and one way to bring it back is a string of stock market gains, he said.

But when that will happen is unclear. Many recent rallies, like yesterday's, haven't carried into the next day.

"For investors ... they are still not sure whether to buy them or sell them in the end," Battipaglia said.

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