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Stocks Rejoice after the Fed Answers Wall Street's Prayers

Wall Street, notorious for its hatred of surprises, loved the one it got on Wednesday from Alan Greenspan: A whopping half percentage point reduction in interest rates.

The beaten down Nasdaq acted like it was back to its old record-breaking self again, topping all-time highs for daily volume and percentage gains. But even though the Federal Reserve Chairman's move provided a much-needed pick-me-up for the market, it also left many on Wall Street wondering about the gravity of the U.S. economy's slowdown.

"They clearly declared an emergency," says Pierre Ellis, senior economist at Primark Decision Economics. "It think they basically became convinced that they could be on the brink of a recession and that they better do something fast."

Growing evidence that the U.S. economy is cooling off dramatically had led Wall Streeters to conclude that the Fed would soon ease borrowing costs, but many did not expect the inflation-fighting central bankers to act much before their Jan. 30-Jan. 31 meeting. A report on Tuesday that showed the nation's manufacturing activity slowed dramatically in December fueled a fierce sell-off in Tuesday's session.

At the very least, few expected the Fed to do anything before Friday's release of closely watched employment data. But sure enough, shortly after 1 p.m., the Fed lowered the Federal Funds rate -- the rate at which banks loan money to each other overnight -- by 50 basis points to 6%. The discount rate was also cut 0.25%.

"The Fed's message is clear," says Alan Ackerman, market strategist at Fahnestock and Co. "They are now prepared to fight a slower economy rather than fight inflation."

Concerns that the slowing economy will scrunch corporate profits have kept the market in a deep, dark funk for the past few months.

Stocks streaked higher after the rate cut news with the Nasdaq Composite index rocketing up 324.82 points, or 14.1 percent, to 2,616.68. It was the tech-laden Nasdaq's top point gain ever and also its biggest percentage gain. It's previous percent gain high was a 10.48% jump on Dec. 5, 2000. The latest record surge came just a day after The Nasdaq fell to a low not seen since March 1999. Volume, too, was a record, with more than 3.09 billion shares shares changing hands.

"The Fed wanted to nip the panic in the bud, [to] make sure the market doesn't get too carried away with the perception that we were moving to a hard landing," says Michael Englund, chief market economist for Standard & Poor's.

Much of the heavy lifting in the Nasdaq was done by the index's biggest names with data networking company Cisco Systems Inc. (CSCO) up 8 to 41-5/16 and telecommunications company WorldCom Inc. (MCI) up 4-1/16 to 20.

The Dow Jones industrial average, meanwhile, whipped up 299.20 points, or 2.8%, to 10,945.30 on the strength of its technology and interest-rate sensitive financial services components. Dow component IBM Corp (IBM), the world's No. 1 computer maker, blasted up 9-13/16 to 94-5/8, while software giant Microsoft Corp. (MSFT) gained 4-9/16 to 47-15/16.

Fellow Dow component J.P. Morgan Chase & Co. (JPM), the product of the merger between financial services giants J.P. Morgan and Chase Manhattan, added 6-5/8 to 50-5/8. The rate reduction was also a boon for the Dow's retailing components, which are also seen as sensitive to changes in credit costs.

The Standard & Poor's 500 index, a broad stocks gauge, raced up 62.23 points, or 4.8%, at 1345.50.

In its decision, the Fed said it was prepared to cut interest rates further. Many analysts said they believed there would be a lag before the Central Bank's latest move perked up the flagging economy and that further action would be needed.

"I don't think they have done enough," Ackerman says. "More than one interest rate cut will be required in an economy that has slowed dramatically in such a short period of time."

Christine Callies of Merrill Lynch said in a research note that the Standard & Poor's 500 index generally has risen about 10% within three months of a rate cut and by about 19% six months after the decrease.

One of the sectors that bounced the most was the one hardest hit by the economic woes: the Internet sector. The Dow Jones Internet Index screamed up 20.6%. America Online (AOL), the Internet service provider in the process of acquiring media company Time Warner, rose 5.11 to 37.50.

Another big beneficiary was the semiconductor sector with the Philadelphia Stock Exchange's Semiconductor Index up 17.5%. The chipmakers have been hosed in recent weeks as the outlook for the personal computer industry has dimmed.

Intel Corp. (INTC) gained 3-5/32 to 34-7/32 after languishing earlier in the session after Lehman Brothers cut its 12-month target on the world's largest chipmaker.

Even chip and electronics maker Texas Instruments (TXN), which had skidded earlier in the session after Morgan Stanley Dean Witter lowered its investment rating on the stock to neutral from outperform, was up 3-15/16 to 50-1/4.

Some techs still lost ground, however, including e-mail services company Tumbleweed Communications (TMWD), which fell 6-20/32 to 3-12/32 after warning that it sees a fourth quarter loss of operations in the $17 million to $18.1 million range, citing slower information technology spending.

Drug companies, often viewed as so-called defensive stocks, were largely left out of the post-rate cut rally with the American Stock Exchange's Pharmaceutical Index off 4%. Stocks in another area viewed as a good place to be in a down market -- utilities -- were also lower.

Treasury Market

U.S. Treasuries fell sharply as stocks roared back to life. Traders said a big reason for the slide was that bonds had already rallied steadily in anticipation of a Fed rate cut.

According to Standard & Poor's economic research unit MMS, evidence of an economic slowdown, erosion in consumer confidence, and weakness in equities obviously convinced the Fed to act sooner rather than later. MMS said its forecasts suggest the numbers on sales, production, and confidence are probably going to look worse before they get better, especially given the horrible weather through the turn.

MMS said it believes that the Fed's rate-setting committee will continue cutting rates through the first quarter, with another 25 basis point easing at the Jan. 31 meeting and another one at its Mar. 20 meeting.

A minor economic report on Wednesday conformed to a picture of a slowing U.S. economy. According to the figures, U.S. construction spending fell 0.6% in November from a downwardly revised 0.8% increase in October (previously +0.9%). Weakness was centered in public construction, which fell 2.1%.

The fixed income market is awaiting Friday's release of employment data for further clues on how much the economy is slowing

Stocks in the News

Federated Department Stores (FD), the name behind Macy's and Bloomingdale's, posted 1.2% higher December same-store sales and flat total sales. The company said it was disappointed with sales, attributing the problems in part to heightened consumer concerns over slowing economy.

Office equipment retailer Office Depot (ODP) sees a $280 million to $300 million charge to 2000 earnings per share primarily related to decision to close 70 retail stores. The company also sees about a 5% decline in fourth quarter same-store sales.

World Markets

European markets closed mixed. The London Financial Times-Stock Exchange 100 index was off 134.80 points, or 2.18%, at 6,039.90. In Germany, the DAX index, meanwhile, was up 149.03 points, or 2.37%, to 6,438.85 after a survey showed economists believe German manufacturing orders fell 0.3% in November. German DIW research unit says European Central Bank has wasted chances to stimulate faster EuroZone growth. France's CAC 40 was down 114.85 points, or 1.98%, at 5,684.05.

Japan's stock market was closed. Hong Kong's Hang Seng index, meanwhile, ended off 280.36 points, or 1.89 percent, at 14,589.58. By Eric Wahlgren in New York

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