May 2, 2001

Misplaced Optimism

The stock market rally of the past few weeks has resulted in growing investor optimism that the economy is on the mend. But that optimism is misplaced.

Corporate profits plummeted in the first quarter, and the outlook continues to be negative for the majority of companies. And, as companies struggle to improve their bottom lines with layoffs and reduced capital spending, the prospects for a protracted downturn remain high. Evidence that Americans have reduced spending because of layoffs continues to mount. As the numbers of layoffs increase, the effect on spending will be tenfold. In addition to decreased consumer spending, corporate profits and earnings will only fall further as companies trim the bottom line by putting investments in new equipment and the latest technology on hold.

As for those who are think the Fed's rate cuts are the cure-all for this ailing economy, think again. The tidal wave of economic declines on the way completely wash out any stimulative affect the Fed's rate cuts might have.

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