Posted on: Thursday, March 15, 2001

Pressure mounts for Fed to cut rates

By Brad Foss
Associated Press

NEW YORK — With corporate America unable to quiet its drumbeat of earnings and revenue warnings, economists and Wall Street analysts say it is up to the Federal Reserve to jolt sagging financial markets and restore investor confidence with a dramatic rate cut.

Investors looking for indications that stock markets are becoming healthy again — and not experiencing a short-lived bear market rally, as happened on Tuesday — should wait to see a string of solid days on Wall Street, a signal that widespread selling has ended, analysts said.

Yesterday, stocks were hammered once again, dragged down by worries of an international economic slowdown. While the Fed is expected to slash interest rates by half a point next Tuesday, Wall Street is seeking a fatter rate cut to trigger a rebound.

The Dow Jones industrial average fell more than 317 points, closing below the 10,000 level for the first time since October 2000, while the Nasdaq Stock Market dropped 42 points to fall back below the 2,000 level — more than 60 percent off its high.

Stock market declines "usually end when investor frustration is at its highest level," said Gary Thayer, chief economist at A.G. Edwards & Sons Inc. "What is historically an encouraging sign is a market recovery on big volume. We've had some rally attempts, but the sentiment is still very negative."

Ricky Harrington, an analyst at Wachovia Securities, said a market rebound will not occur until investor sentiment is downright "pessimistic."

The dominant feeling among investors "has moved from complacency to concern," said Harrington, who added that market indices will fall further before a bottom is reached.

On Dec. 6, 1996, when Fed Chairman Alan Greenspan uttered his now famous line questioning whether investors' "irrational exuberance" led to "escalated" stock prices, the Standard & Poor's 500 index stood at 744.38, the Nasdaq composite index at 1,300.12 and the Dow at 6,437.10.

That markets could approach these levels once again is "totally possible over the coming year or so," Harrington said, urging individual investors not to jump back into the market too quickly.

"As far as trying to guess the bottom, people would be better off staying on the sidelines," Harrington added.

While investors remain focused on pessimistic financial forecasts by some of the nation's biggest companies, including Intel Corp. and Cisco Systems Inc., earnings reports tend to be lagging indicators and not the best way to gauge the health of the U.S. economy, said Sung Won Sohn, an economist at Wells Fargo & Co.

Low unemployment and rising wages, Sohn argued, suggest the average American is in reasonable financial shape.

The key, he adds, is to restore consumer confidence, which fell for the fifth month in a row in February to its lowest level in more than four years.

"The reality is not as bad as the perception," Sohn said, calling stock markets "the canary in a coal mine that has been grasping for oxygen" — in particular, a big interest rate reduction.

Sohn said Greenspan needs to pleasantly surprise investors by cutting rates by three-quarters of a point or more. "That could not only stop the slide, but start a small rally," Sohn said.