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February 28, 2001

You Can't Always Get What You Want

Not only did Greenspan admit that the economy still has a long way to fall before hitting rock bottom, he also made it clear that the Fed wouldn't cut rates before its March 20th meeting. Investors may not be getting what they want, but they are getting precisely what they need -- a strong dose of reality.

The fact is, a rate cut isn't going to cure the ills of the U.S. economy -- whether it comes next week or next month. The U.S. economy is barreling toward recession (and might already be in one). The newly revised GDP for the fourth quarter of 2000 showed growth at a dismal 1.1% and is likely to be lower or even negative in the first quarter of 2001.

Spending has shown definite signs of slowing -- new home sales dropped over 10% in January, consumer credit grew at a pace well below that of recent months. And the surge in inflation and layoffs have certainly put a damper on any future buying plans. Consumer confidence levels have taken a severe nosedive in recent months, and it is likely that a recession could last well into this year and the next.

In this environment, company earnings will only get worse in coming months. And when the next round of earnings reports comes out, watch out! The reality is, interest rate cuts don't make a bit of difference in the short term, and when companies issue more disappointments, investors will hammer stocks into the ground.

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