In der Recession bedeuten Zinsreduzierungen nicht
Kicky : In der Recession bedeuten Zinsreduzierungen nicht
A Voice That Says a Rate Cut Is Not the Cure for All Ills
By GRETCHEN MORGENSON
SINCE the Federal Reserve Board cut interest rates , le tout Wall Street has risen up like a chorus, saying that stocks are always the best place to be when rates are falling. Well, pas exactement.
One who has not joined the crowd is Byron R. Wien, chief United States investment strategist at Morgan Stanley Dean Witter and one of those rarities anywhere ? an independent thinker. "It isn't a sure thing that just because the Fed eases, the stock market goes up," Mr. Wien said. "The key differentiating factor is whether we are in a recession."
Investors can be forgiven for wanting to believe that rate cuts from Mr. Greenspan translate automatically into stock market gains. That is, after all, what their recent experience has taught them. "Everyone remembers what happened when the Fed eased in 1995 and 1998," Mr. Wien said. "But both were because of financial crises, not recessions." The 1995 crisis started with the devaluation of the Mexican peso, and the more recent turmoil was a result of Russia's default on its debt and the collapse of the huge hedge fund, Long-Term Capital Management.
Longer memories are required, however, if investors are to recall the way stocks reacted to rate cuts that were prompted by a recession. Mr. Wien has gone back 10 years to help explode the myth that just because the Fed eases, stocks always rally strongly.
In June 1989, after a period of rising interest rates, the Fed began to ease, initially cutting the Fed funds target rate from 9.81 percent to 9.56 percent. The day of the first cut, the Standard & Poor's 500-stock index stood at 326.69.
Roughly 18 months later, when Fed funds were at 7 percent and the nation was in recession, the S.& P. had risen a mere 2 points, to 328.72.
Stocks did rally somewhat during that time, of course. In July 1990, the S.& P. index traded as high as 368.95, a gain of 13 percent from the June 1989 level. But investors who held on wound up making no money during the period. Only in early 1991, when investors sensed that the recession was ending, did stocks start to stir.
No one knows, of course, if what is now just an economic slowdown will turn into a recession, defined as two consecutive quarters of negative growth in gross domestic product. Mr. Wien, for one, thinks that the economy will dip into a shallow and relatively short recession in the first half of this year. And the employment report last Friday, which showed a sharp falloff in labor demand, only cemented his view.
"This economy is unraveling at a very rapid rate," Mr. Wien said. He also believes that economic recovery in the second half will be muted and that corporate profit surprises will be more downside than up.
As a result, investors who think they can jump back into stocks with both feet just because the Fed is behind them should consider an alternative investment: boring, dull United States Treasury bonds.
As the Fed cuts rates aggressively this year, Mr. Wien thinks that yields on the 10- year Treasury could drop to 4 percent. That is a sharp decline from Friday's close of 4.93 percent. If Mr. Wien is correct, the decline would translate to a gain of roughly 8 percent for an owner of such a security, not counting the 5.75 percent coupon. And at virtually no risk to capital.
. Investors picking through the junk-bond market must be extremely selective, he said, because the economic slowdown will probably bring a raft of bankruptcies among these companies.
There is no doubt that the Fed will do what it must to rescue the economy. But don't look to stocks to star again soon.