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player ready...The strains of “Happy Days Are Here Again” floating around Wall Street the last two days prompt a historical reminder.
The song, which became the anthem of the Franklin Roosevelt presidential campaign in 1932 and embodied hopes for renewal during the Depression, was introduced just days before the stock market crash of 1929: “Your cares and troubles are gone; there’ll be no more from now on.”
In other words, songwriters are about as good as investment professionals in forecasting major economic events.
Nonetheless, the urge persists to survey the fallout from Tuesday’s surprise interest rate cut by the Federal Reserve in search of likely winners and losers in stocks.
At least four potential equity themes emerged in the early reaction to the Fed’s move.
– First, there is a great deal of concern that Fed Chairman Ben Bernanke acted not because of publicly disclosed economic data but to offset a looming crisis that has not reached public attention.
“It makes me suspicious that there’s something he’s seeing that the rest of us aren’t seeing,” said Jack Rivkin, chief investment officer at Neuberger Berman. “I’d almost be willing to take that bet.”
One investment implication: “You don’t want to fight re-inflation, because that’s what the Fed is doing,” said Nick Raich, director of research at National City Private Client Group.
“We think justification for industrials, materials and energy [stocks] to move higher is going to occur to the point that we have a potential bubble created down the road.”
In one sign of inflation fears, gold moved higher in futures trading Wednesday, even though the dollar bounced back a bit from its recent slide. Gold’s price typically climbs as the dollar loses value.
– Second, consumer-related stocks have been among the weaker sectors to respond to the Fed move, despite the traditional objective of Fed interest rate cuts to boost consumer spending and confidence.
“Investors are trying to decide how this [Fed move] will help the consumer,” said Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research. “It won’t reduce their debt levels.” Payments on adjustable-rate mortgages likely will rise on schedule, he added.
“In general, consumers are likely to see some weakening,” Stovall said.
– Third, the Fed move has not inspired a greater appetite for risk, at least among large-company stocks. Large-cap technology stocks, which rallied in late August, lagged other sectors in the last two days.
On the other hand, utilities and dividend-paying stocks, considered defensive investments at times of market stress, have done well since the Fed cut. The Dow Jones utilities average outperformed the Dow industrial average in the last two days.
– Fourth, the Fed move clearly brought aid and comfort to banks. By cutting short-term interest rates, the Fed reduced the cost of money, the raw material for financial firms.
But even in this sector, there are doubts. The S&P 500 index of financial stocks barely budged Wednesday, as Morgan Stanley, JPMorgan Chase, Citigroup and Bank of America lost ground.
Lower rates are good for financial stocks, but picking the right ones is like playing “Russian roulette,” as long as the fallout from the credit crunch still looms, Rivkin said.
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