After the Federal Reserve's first interest-rate reduction in January, stocks soared and investors trotted out statistics showing that the market almost always rallies when borrowing costs fall.
Not this time.
Four months and four more rate cuts later, the Standard & Poor's 500 Index is down 5.4 percent for the year and is 7.3 percent lower than its close on Jan. 3, the day of the surprise rate reduction.
The central bank reduced rates again today by a half percentage point. Investors now say lower rates will spur a rally in stocks -- just not as fast as initially expected.
"People have no patience," said Scott Vergin, who helps manage US$4 billion at The Lutheran Brotherhood Inc in Minneapolis.
"They expect things to happen right away, but it takes a while." The Fed's five interest rate reductions this year have lowered the overnight bank lending rate to 4 percent. That should spark the economy and corporate profit growth, lifting stock prices, investors say.
While stocks have rallied in the past month, boosting the S&P 500 13 percent from its April 4 low, in January investors expected a rally much sooner.
The NASDAQ Composite Index surged a record 14.2 percent on Jan. 3. It was the first time the Fed lowered rates since November 1998 and the timing and the size of the half-point reduction caught many investors and traders off guard.
The central bank's decision to lower rates marked a turning point for the market after a plunge that had sent the NASDAQ composite down 55 percent from its March 2000 peak, investors said at the time. They pointed to studies by firms such as Ned Davis Research Inc. that showed a rally was due.
"You've got the odds in your favor that three months, six months and 12 months later the stock market will be higher after the Fed eases rates," Ed Larsen, chief equity officer at AIM Capital Management Inc, said after the first rate cut.
Investors who counted on that performance lost out.
The S&P 500 fell 18 percent in the three months after the first rate reduction. The NASDAQ Composite Index lost 36 percent and the Dow Jones Industrial Average slipped 13 percent during the period.
Historically, the S&P 500 has gained an average of 7.6 percent in the three months following a first interest rate cut, according to Ned Davis Research.
While many investors were optimistic the January cut meant the worst was over for stocks, it took three months until the market found its lows on April 4.
The Fed trimmed rates two more times during the first quarter, once in late January and once in March, and the moves failed to generate the same record-setting gains the initial reduction did. Investors fretted the U.S. would slide into a recession, sending earnings plunging, before the lower rates took effect.
Still, stocks began to rally as those concerns ebbed and investors speculated that profit growth would pick up late this year or in 2002.
The Fed surprised investors one more time last month when it cut rates by another half point in between meetings on April 18.
The NASDAQ soared to its fourth-biggest gain by rising 8.1 percent.
Stocks finished little changed on Tuesday as the Fed's statement that the US economy faces a risk of further weakness suggests corporate profits will continue to erode, investors said.
Since the low on April 4, the NASDAQ has rallied 27 percent.
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