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SIVY ON STOCKS from money.com
April 18, 2001 The rebound begins Greenspan's aggressive rate cutting will fuel a market comeback that should boost stock prices 20 percent or more over the next 12 months. By Michael Sivy For nine months, the economy has been slowing. And most growth stocks have been dragged down by a brutal decline in tech shares. Through it all, investors complained that the Federal Reserve was keeping interest rates too high. Well, there's nothing left to complain about. Fed chairman Alan Greenspan's surprise half-point cut on Wednesday brings interest rates down to where they should be. And make no mistake about it -- the economy will begin picking up speed, and the stock market will be substantially higher a year from now. Greenspan has been widely criticized for keeping rates high for so long. He began raising them in early 1999 and continued to keep rates up through the end of last year. High rates made sense in the first half of 2000, when the GDP was growing at an annual rate around 5 percent, fast enough to rekindle inflation. But it was a mistake for Greenspan to continue keeping money tight after growth slackened to 2.2 percent in the third quarter. Moreover, even once he began cutting rates in January, he brought them down too slowly. I believe that Greenspan held up rates for so long because he knows how tough it is to fight inflation. For political reasons, it's often hard to increase interest rates. So when the Fed has a chance to give inflation an extra push down simply by keeping rates up a bit too long, that's the politically savvy choice. Greenspan even has a term for that ploy -- he calls it "opportunistic disinflation." Such a policy was perfectly feasible as long as the economy was expanding slightly -- and thereby narrowly escaping recession. But capital spending continued to weaken and mounting stock market losses threatened to undercut consumer spending. Then when the March employment numbers were announced on April 6, they showed the first drop in a long time. With employment weakening -- and unemployment rising -- Greenspan could no longer afford to keep his foot on the brake. And so, two weeks later he cut rates, laying the groundwork for a substantial rebound. I'm not minimizing the risks that still exist. The economy will most likely be weak for another quarter. And plenty of individual stocks will suffer in May and June as companies warn of disappointing second-quarter results. There are also lots of industry-specific problems to worry about. Banks face rising losses on bad tech loans, telecommuniciations companies could suffer from overcapacity for at least another 18 months and various tech firms are still trying to work off excess inventories. In fact, the current market rally could burn out in a week or two. But I believe the market has already seen its lows. And if those lows are re-tested between May and July, I doubt the indexes will go much below where they've already been. More important, the prices of big, strong, well-established growth stocks figure to be substantially higher a year from now. Historically, after the Fed has cut rates four times in a row, blue chips gain more than 20 percent over the following year. I think we're looking at those kinds of gains again. Tech stocks will rally, but so will other glamour growth stocks, including entertainment shares and top retailers. I've already mentioned in this column that I jumped the gun by loading up on tech indexes in January and February, and then running up 15 percent to 20 percent losses in March as the sector suffered its final drop. Well, after today I'm almost even, so I plan on buying myself a really good brandy after dinner this evening. And whatever the ups and downs of the next few months, I expect to be feeling even better come next April. ### Post your comments on Michael's column at: http://www.money.com/depts/investing/sivy/index.html To subscribe or unsubscribe to Sivy on Stocks, go to: http://www.money.com/email/ ----------------------------------------------------------- MARKETPLACE ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! Over 5,000 contact names in the OFFICIAL FORTUNE Databases. DOWNLOAD THEM NOW! http://www.fortune.com/datastore/?mn1 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Special Internet Offer!!! 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