By Arnie Kaufman
With inflation low and the dollar strong, the Fed has the room to lower rates aggressively to keep the economy out of recession. S&P chief economist David Wyss expects the central bank to continue to take full advantage of this leeway, a clear plus for the market.
The timing of last week's inter-meeting fourth half-point cut in the fed funds target since January was designed to have maximum impact on business, consumer and investor confidence. As stocks were already enjoying a bit of a tailwind, the central bank's action sent them soaring.
Profit taking occcurred, as was to be expected. But it was absorbed reasonably well, aided by rare positive earnings surprises from a few bellwethers.
The market had looked "sold out" even before the latest rate cut, and was able to advance modestly in the face of a projected steep profit shortfall and massive inventory write-down at Cisco Systems. Apparently, the contraction in information technology spending had been sufficiently discounted via the many broad sell-offs as one after another of the tech leaders lowered their sights in recent months. S&P chief technical analyst Mark Arbeter, though encouraged by the bounce, believes that the advance will soon run into overhead supply (higher prices prompting sales by investors seeking a second chance to get out).
Nevertheless, it seems that the worst is over. The basic strengths of the economy will re-emerge before long, and the efficiencies and controls instituted by many companies during the slump will produce ongoing benefits.
We continue to recommend bargain hunting.
Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook