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May 11, 2001

One Big Exception

Sure, Irwin Kellner from CBSMarketwatch may be correct in noting that "with only one exception (1929-30), the stock market responded favorably [to five rate cuts in a 12-month span] in as little as six months' time." But 1929-30 is a big exception to ignore. In fact, in addition to multiple rate cuts, there are many similarities between that period of time and today that should not be overlooked.

First, the bubble in the technology sector. In 1929-30, new technologies such as radio and automobiles swept the nation and drove stock prices sky high, just as the Internet, cell phones, and computers have done more recently. In addition,Americans back then were up to their eyeballs in debt , and they are even more so today. And, when the economy started to stagger, Americans responded by tightening their belts. We are starting to see evidence of just that today -- consumer confidence has fallen considerably in the past year, and consumers are cutting their spending and looking for bargains at Wal-Mart and other discount stores.

A series of interest rate cuts didn't help the stock market bounce back in 1929-30. And we're confident that similar Fed cuts now are also too little, too late...

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