When the US Federal Reserve cut interest rates six months ago, investors stampeded into stocks, certain that lower rates would mean higher share prices. Wednesday, the Fed cut rates again -- by one-quarter of a point -- and investors simply yawned.
The gulf between the two reactions shows what months of bad corporate earnings news can do to the normally buoyant mood of stock-market investors. Now painfully aware that the Fed's moves do not translate into an immediate lift in corporate results, investors are taking a wait-and-see approach to stocks.
``What the market reaction says to me is that Fed easing is not going to immediately help stocks right now,'' said Bill Quan, director of research at Fuji Securities in New York. ``Fed easing is not going to help companies cut costs or regain pricing power; they have to contend with those issues themselves. What the Fed is doing is keeping the consumer side of the economy afloat while the business sector readjusts for the excesses of the past few years.''
The Dow Jones industrial average fell 37.64 points Wednesday, to 10,434.84, while the NASDAQ composite index gained 10.12 points, to 2,074.74.
The muted reaction to the sixth rate cut this year is notable because the major stock gauges are lower than they were when the Fed began the reductions that have taken the federal funds rate to 3.75 percent from 6.5 percent. The Dow Jones industrial average is 3.25 percent lower than it was when the Fed began easing and the NASDAQ composite is down 16 percent.
Investors seem worried not only that the US economy has failed to respond yet to the medicine of Alan Greenspan, the Fed chairman, but also that global weakness may further squeeze corporate profits. With world economies sagging because of the economic slowdown in the US, foreign buyers can no longer be expected to bail out US companies trying to sell their goods.
In its statement, the Federal Reserve acknowledged that the economy was by no means out of the woods and mentioned slowing overseas growth in its list of woes. Since September, US exports have plummeted 4.7 percent.
The opening of international borders that has meant so much to global economic growth now threatens to tip the world economy into recession as the engine of that growth -- the US economy -- slows. Weakness in demand abroad will keep a lid on corporate profits.
Economists at Morgan Stanley expect world trade volumes to rise 4.3 percent in 2001, down considerably from a 12.8 percent increase last year. This will be the steepest decline on record.
The problem is, global trade accounts for a growing portion of world GDP. Morgan Stanley estimates that the volume of world trade amounts to about one-quarter of world output, double the share that prevailed in the 1970s. As a result, declines in world trade will reinforce the downtrends in the US, Japan and Europe.
Unfortunately, the Fed can do little to restart global demand for goods. Stephen Roach, chief economist at Morgan Stanley, said: ``The Fed funds rate at this point is not going to temper global contagion. It's a new dimension to this downturn.''
The only ray of sunshine on an otherwise gloomy economic scene is the American consumer, who has remained remarkably willing to spend in recent months in spite of the downturn. But economists say that continued large-scale job losses and a stagnant stock market could alter that behavior.
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