Posted at 10:55 a.m., Wednesday, June 27, 2001

Market disappointed by Fed action

Associated Press

NEW YORK — Blue chips fell today after the Federal Reserve delivered a smaller interest rate cut than Wall Street wanted.

The Fed announced in midafternoon it was lowering short-term rates by 0.25 percentage point, half of what the market felt was necessary to restart the economy. It was the sixth cut this year.

The Dow Jones industrial average ended today down 37.30 at 10,435.18, according to preliminary calculations. The Dow was up about 25 before the Fed's announcement.

The broader market finished mixed. The Nasdaq composite index eked out a modest gain, up 10.13 at 2,074.75, essentially unchanged from where it stood before the Fed's move. The Standard & Poor's 500 index fell 5.69 to 1,211.07.

Investors have been anxiously awaiting signs that the five previous reductions — each half a percentage point — have helped business. But so far corporate profit warnings, topping 600 so far this quarter, have indicated weakness remains in many sectors.

Analysts did not expect a rally to follow this latest rate cut, regardless of its size.

"I think the market is looking for real fundamental guideposts for true traction for a turnaround," said Philip S. Dow, managing director of equity strategy at Dain Rauscher Wessels in Minneapolis.

Dow said that would include positive signs about earnings, companies announcing they are hiring or opening new plants, or encouraging government reports on the state of the economy.

"Those just aren't coming," he said.

However, analysts pointed out that it typically takes six to nine months after the Fed starts lowering rates for the economy and business to benefit. The Fed made its first two cuts in January.

"We think that the second quarter will prove to be the slowest quarter, and the third quarter will be the rebound, and by the fourth quarter growth will have resumed quite nicely," said Ronald J. Hill, investment strategist at Brown Brothers Harriman & Co.

Aside from the rate cuts, Hill said, the economy has other factors in its favor, including income tax refunds to be mailed to Americans in the third quarter. The rebates are expected to boost consumer spending, which accounts for two-thirds of the economy.

But yesterday even sectors typically among the first to benefit from lower rates were among the decliners. Retailer Target fell $1.47 to $35.26, while banker J.P. Morgan Chase stumbled 66 cents to $44.02.

Among the biggest losers was CVS, which plunged $7.59, or 17 percent, to $36.51. The nation's second-largest drugstore operator warned that earnings for the second quarter and the year would be lower than expected because of weak sales.

Most gains and losses were more moderate, however.

Lucent slipped 13 cents to $5.87 after the Wall Street Journal reported that the company might lay off an additional 10,000 workers because of continued restructuring.

General Mills rose 50 cents to $42.80 after the maker of Wheat ies, Cheerios and Chex reported earnings that met analysts' expectations.

Smaller stocks fared better today as the Russell 2000 index rose 4.76 to 495.58. Analysts say smaller companies benefit more from lower interest rates because they borrow more money and at higher cost.

Advancing issues outnumbered decliners more than 3 to 2 on the New York Stock Exchange, where volume was 1.14 billion shares, compared with 1.19 billion yesterday.