Stocks Get a Shot in the Arm

The Fed's inter-meeting easing shocked the market -- and fueled a strong rally in the major indexes

It was like a dose of adrenaline from Dr. Greenspan. Early in the session on Wednesday, Apr. 18, U.S. stocks were poised for solid -- if not exactly spectacular -- gains, thanks to relative good earnings news from Intel Corp. (INTC ) and positive comments from Goldman Sachs market strategist Abby Joseph Cohen. Then, shortly before 11:00 a.m. ET, the Federal Reserve announced a surprise inter-meeting half-percentage-point cut in the Fed funds target rate.

That's when the bull run began.

Virtually all sectors staged a spectacular rally, with the exception of certain defensive sectors, as recently beaten-down growth stocks once again became attractive.

Bob Baur, director of economics and analytics at Principal Financial Group, says the Fed had several solid reasons for the inter-meeting easing, not the least of which is the latest government reports showing that inflation remains in check. In addition, Baur says that due to the stock market's rally of the past couple of weeks, it would not be perceived that the Fed's rate cut represented an attempt to bail out the stock market -- something Chairman Alan Greenspan has repeatedly said is not a factor in policy decisions. Baur points out that today is approximately midway between the two meetings, so "it almost looks as though the Fed had this rate cut planned to some extent at their last meeting."

The Dow closed up 399.10 points, or 3.91%, to 10615.83. Volume on the Big Board was just over 1.9 billion shares, making it the second most active trading day in NYSE history. The Nasdaq Composite index gained 156.22 points, or 8.12%, to close at 2079.44. Nasdaq volume totaled 3.18 billion shares, marking that exchanges second-highest total ever. The broader S&P 500 gained 46.35 points, or 3.89%, to 1238.16.

David Wyss, chief economist at Standard & Poor's, also says the cut smelled of a planned move, though he admits to being a bit surprised at the timing of the announcement. "Clearly, if this would have happened a week ago, it would have been no surprise at all after the weak employment numbers we saw from March," he says. "But now we're coming off of two good economic reports with industrial production and trade, so it's sort of 'why now?'"

As a result of the announcement, Wyss believes the Fed will cut rates by 25 basis points at its May 15 policy meeting, rather than the previously expected 50-point easing. "But I think we'll still have another rate cut [in May] and probably at least two more rate cuts" for the year. Wyss believes these easings will have the desired effect -- but not until 2001. "We still have to get through the next six months, which isn't going to be easy."

Even with today's Fed-related euphoria, the question remains whether the market has bottomed. Pundits argue both sides of the coin. Larry Rice, chief investment officer at Josephthal & Co., remains skeptical and believes that we have not seen the ultimate market bottom. He points out that market and economic fundamentals are still unimproved, mutual-fund cash positions are too high, and price-earnings ratios, especially within the technology sector remain comparatively high. "The problem becomes, as this [rally] continues its unfolding, is that we corrected the oversold from three weeks ago, and it's not going to take much to get it overdone."

Treasury Markets

Treasuries ended solidly higher following the surprise rate cut. On the data front, the U.S. trade deficit narrowed dramatically to $27 billion in February from $33.3 billion in January -- the smallest gap since December, 1999. S&P's economic research unit notes that the surprising drop was due almost entirely to a sharp 4.4% decline in imports, consistent with the economic slowdown in the U.S.

Stocks in the News

Hewlett-Packard (HWP ) sees $0.13-$0.17 Q2 EPS, including $150 million in one-time charges. The company also forecast 2% to 4% Q2 sequential, year-over-year revenue declines. Cites worldwide IT spending slowdown.

Texas Instruments (TXN ) posted $0.18 vs. $0.28 Q1 EPS on an 8% revenue decline. The company expects Q2 revenue to decline about 20% sequentially as semiconductor customers continue to work through excess inventories. The company expects to layoff 6% of its workforce.

AOL Time Warner (AOL ) posted 20% higher Q1 EBITDA, $0.23 vs. $0.19 cash EPS on 9% higher revenues.

World Markets

In London, the Financial Times-Stock Exchange 100 closed up 129.10, or 2.24%, to 5890.20. In Germany, the DAX Index ended up 225.76, or 3.80%, to 6161.34. In France, the CAC 40 gained 164.10, or 3.07%, to close at 5505.08.

In Japan, the Nikkei gained 574.70, or 4.40%, to close at 13641.79. In Hong Kong, the Hang Seng index ended up 366.35, or 2.91%, to close at 12972.80.

By Alan Hughes in New York

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