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Rate cut too little to help market

Stock investors were hoping for a 3/4-point trim

Thanks for nothing.

That's the attitude equity investors were taking Tuesday after the Federal Reserve, led by Chairman Alan Greenspan, lopped half a percentage point off interest rates, a move seen as too little too late by Wall Street, which reacted by sending the Dow Jones industrial average down another 238 points (2.39 percent) to 9,720.

Meanwhile, the bear market's favorite whipping boy for the past 12 months, the NASDAQ composite, gave back another 94 points (4.80 percent) to 1,857, and the S&P 500, hardly a bastion of speculative dot-coms, lost 28 points (2.31 percent) to 1,143.

In early trading Wednesday, the Dow was down another 75 points at 9,645, while the NASDAQ crawled up 24 at 1,881.

What's all this talk about a new millennium? As far as those market indexes are concerned, we're back in 1998 for the NASDAQ and S&P 500 and early '99 for the Dow.

Prior to Tuesday afternoon's meeting of the Fed's Open Market Committee, which sets short-term interest rates, many market watchers thought it would take a 3/4-point cut in the federal funds rate to make stock traders happy. They were right.

"The Fed talks about how important consumer confidence is, but they don't seem to be doing a whole lot about it," said David Young, president of Paragon Capital Management Inc., a Provo-based investment firm.

"They did a great job raising rates over the past two years to cool the economy, but then the Fed lost touch last fall. They're now way behind the curve on this thing."

So much for Greenspan's "soft landing" — at least as far as the stock market goes. And so much for his persona as an economics genius who can play the nation's economy like a Stradivarius. For the first time in Greenspan's 14 years at the Fed, the national news wires are full of quotes from analysts proclaiming that if things get much worse, the Fed chairman will be blamed by President Bush, the Congress and everyone else for letting the economy — and peoples' savings — go down the tube.

But Bob Earl, first vice president of Prudential Securities in the firm's Salt Lake office, notes that boosting investor portfolios is not Greenspan's job.

"Most people were hoping for more (than a half-point cut), but the Fed makes monetary policy to help the economy, not to move the market," Earl said.

True, but about half of all U.S. families own stocks, much of them in 401(k) and IRA retirement plans. Those folks all feel much poorer today than they did a year ago, and when people feel poor, they don't spend. If they don't spend, the economy can't recover.

It's the Catch-22 of Economics 101.

For that matter, lowering the federal funds rate (the rate that banks charge each other for overnight loans) does not instantly transform the economy, even though most banks had lowered their prime rates by a half-point by the opening of business Wednesday. Mortgage rates and other consumer loans should come down as well.

Young of Paragon Capital has been telling his clients to sit tight and wait it out rather than lock in losses by selling out at prices not seen in three years. But for retirees who have seen their nest eggs evaporate because they were too aggressively invested in the long-running bull market, that's a tough call.

"When it comes to people's life savings, things get real sketchy," Young said. "If they bail, they give up the chance for a 20 to 30 percent pop (upward). But if they hang on, they could see another 25 percent downturn, and they can't afford to have that happen. They have to make a decision on whether to preserve what's left or shut their eyes and hang on."

Earl of Prudential points out that for more than a decade, market drops have been viewed as "buying opportunities," the chance for investors to add more stocks to their portfolio at lower prices on the expectation that prices will shoot right back up in days or weeks.

"You have to go back to the late '60s or '70s to find a bear market that has lasted like this one," Earl said. "Even the market crash of 1987 took only three months before people were back up to where they had been before."

But in this market, those who have bought on the dips have had their heads handed to them, noted Young.

It may be cold comfort for investors at this point, but most analysts believe the door remains open for the Fed to take further action on interest rates before its next scheduled meeting in May. But considering how little impact its rate cuts have had so far this year, most investors are wondering if any further cuts won't, again, be too little, too late.