A Delayed Reaction for Stocks

Stocks rallied the day after the Fed cut rates -- and indicated it may ease further. Sentiment is ridiculously positive, frets one analyst

Better late than never. It seems that the Federal Reserve's message of May 15 -- an expected 50 basis-point cut in interest rates and an indication that it may ease further to aid a struggling U.S. economy -- just took a while to sink in for Wall Street. Of course, it didn't hurt that a benign report on inflation at the consumer level was released a day after the Fed's move.

That seemed to be the case with Wedneday's session. After barely budging Tuesday following the Fed's rate announcement, U.S. stocks staged a broad-based rally. The Dow Jones Industrial Average, after struggling with the 11,000 barrier for sessions shattered the psychological barrier to end the day at 11,215.92, a gain of 342.95 points, or 3.15%.

The main catalyst for Wednesday's buying frenzy: the release of a tame April Consumer Price Index (CPI) report before the start of trading. The CPI rose 0.3% in April, with a 0.2% gain in the core rate (which excludes volatile food and energy costs). The CPI is up 3.3% over the last 12 months (compare that to a 2.9% rise for all of 2000), with the core up a still-tame 2.6%.

With inflation still looking dormant, it would seem to give the Fed additional leeway to continue cutting interest rates.

The major indexes started Wednesday's session in the red on some negative earnings news from tech names such as Network Appliance (NTAP ) and Sycamore Networks (SCMR ). Also weighing on stocks: nagging doubts that the Federal Reserve's string of easings thus far this year would have the desired effect on the U.S. economy. "While people want to believe that the lower rates are going to stimulate the economy, at this point there is very minimal evidence the initial cuts taken place in January has done anything," said Joseph Barthel, chief investment strategist at Fahnestock & Co.

But after the CPI numbers for April were announced, the mood on Wall Street changed.

Larry Rice, chief investment officer of Josephthal & Co., described today's session as "euphoric" and believes the market is getting ahead of itself as investors seem convinced the economy is in the bottoming process and will turn around sometime in the latter part of the second half. The analyst cites the explosive growth in money supply,several cuts in interest rates and the likelihood of another on June 27. "The pom-poms are out and everybody is bullish and sentiment is ridiculously positive." He says he worries that such exuberance could lead to a bubble that could burst.

Fahnestock's Barthel says some of Wednesday's buying activity was in anticipation of future rate cuts from the Federal Reserve. "Hope springs eternal that the Fed is going to continue on the easing path," he says. "I think you got a sense from the [Fed's accompanying statement Tuesday] that when we come to the June 27 meeting, there will be another rate cut." The strategist believes, however, that the market probably needs a little more consolidation before any significant rally can ensue. If the pre-announcement period is followed by an expectedly negative earnings season, the market could get that pullback.

The Nasdaq Composite index gained 80.82 points, or 3.88%, 2,166.40. Meanwhile, the broader S&P 500 closed higher by 35.54 points, or 2.84%, to 1,284.98.

Among Wednesday's stocks in the news, doughnut chain Krispy Kreme (KREM ) beat Wall Street estimates by reporting $0.20 vs. $0.13 first quarter EPS on 11% higher same store sales (systemwide) and 24% total revenue rise. The company also raised earnings guidance for the remainder of fiscal 2002 to $0.77 per share from $0.69 and hiked its fiscal 2003 EPS forecast to $1.00 from $0.86. The shares ended the session solidly higher.

Treasury Market

Treasuries closed mostly higher. The long bond carved back some of Tuesday's losses, finishing 21/32 higher at 93-06, helped by short covering following the tame 0.2% core April CPI result. Stocks' mid-morning recovery created a reverse safety bid that drove shorter-dated securities lower as participants sold Treasuries to buy stocks.

World Markets

European markets closed mixed. In London, the Financial Times Index was up 41.10 points, or 0.70%, to finish at 5884.00. In Germany, the DAX index ended up 58.22 points, or 0.96%, to 6,128.60. In France, the CAC 40 lost 21.44 points, or 0.39%, to 5,522.69.

Asian markets ended mixed. In Japan, the Nikkei lost 359.76 points, or 2.56%, to close at 13694.27. In Hong Kong, the Hang Seng gained 85.86, or 0.65%, to close at 13335.95.

By Alan Hughes in New York

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