Interest-Rate Cut Isn't Sparking the Stock Market

THE Federal Reserve Board's latest interest-rate reduction - it's fifth consecutive reduction in under a year - is not expected to be any more effective in jump-starting the stock market (as well as the overall United States economy) than the fourth reduction, according to a number of Wall Street analysts and economists.Wall Street greeted the latest round of rate reductions with "somewhat of a yawn," says Dennis Jarrett, chief market analyst for Kidder, Peabody & Co. The Dow Jones industrial average rose only 7.15 points last Wednesday, the day the rate cuts were announced. Still, the modest rise broke a four-day losing streak. The rate reduction - which involved a cut in the discount rate from 5 percent to 4.5 percent, as well as a reduction in the federal funds rate from 5 percent to 4.75 percent - had been widely anticipated. Investors had already "discounted" the cut in terms of market strategy. But beyond that, according to Mr. Jarrett, past historical evidence suggests that such a consecutive series of rate reductions tends to be essentially "neutral" in terms of quickly nudging the market. Jarrett studied six 12-month periods in which the Fed made at least five consecutive rate reductions. The fifth cuts in these series took place on Nov. 3, 1921; May 20, 1930; Aug. 27, 1937; Feb. 19, 1971; May 16, 1975, and July 20, 1982. The average market gain one month after each fifth consecutive rate cut, as measured by the Dow, was 1.17 percent. (The market rose four out of the six years.) Six months after the fifth rate cut the average gain for the market was 0.7 percent. (The market was up four times out of the six cuts.) A year later, the average gain was 7.1 percent. (And again, the market was up four out of the six times the cuts occurred.) But something else occurred. "The more consecutive discount rate cuts you get, the greater the chance" for sharp movements in either an up or down direction months later, says Jarrett. In 1921 and 1982, for example, the market was up by 34 percent and 46 percent respectively 12 months after the fifth straight rate cut. In 1930, it was down 43 percent 12 months after the fifth cut. Discount cuts are not to be disdained, says Jarrett. "But what investors are most looking for is some proof in the economic data that the economy is reviving," and that consumers are "regaining" their confidence, Jarrett says. Finding that data may be tricky for the time being. Albert Sindlinger, who heads up Sindlinger & Co., a consumer research firm in Wallingford, Pa., says some 15 states are now in "depression" economic conditions. At least five are key states in their geographical areas, having profound economic impact on adjacent states: New York, Massachusetts, Florida, Georgia, and Virginia. At the end of the summer, Mr. Sindlinger had only four states in the "depression" category. Sindlinger, who is generally considered to be "bearish," says much of the current economic trouble in the US is structural, involving among other things the downsizing of many key industries. Household income continues to plummet, he says. Thus, he concludes that the Fed will be forced to make another interest rate reduction not far off, probably by early 1992. One reason why interest rate reductions are not sparking the stock market or the economy is because of changing demographics, says Edward Yardeni, chief economist for C. J. Lawrence Inc., an investment house. With half of all Americans now "aging baby boomers," there will be "less-frenzied demand" for consumer products, says Dr. Yardeni. Older Americans tend to save more than they spend. Demographic changes will affect many companies. Big-ticket consumer companies, which saw significant growth rates in sales in past years, will see those sales rates drop, according to a recent study by Richard Hokenson, an economist with the investment house Donaldson, Lufkin & Jenrette Inc. But earnings rates are also expected to slow.