Wall Streeters are worrying that Alan Greenspan might turn his back on them – and possibly send stocks nose-diving again.
Analysts say investors are prepared to stay on the sidelines in trading ahead of the Federal Reserve chairman’s crucial next step tomorrow for pumping cheaper money into the economy during the deepening slowdown.
Many think Greenspan will go ahead with a widely expected rate cut of a half of a percentage point, or 50 basis points, tomorrow afternoon.
But others fear that Greenspan will give only half as much, with a cut of 25 basis points following the surprise 50 point cut on April 18.
Either way, stocks are likely to take a hit, say market analysts.
“Whatever the Fed does won’t be good enough for this market, and I’m afraid we’ll hit a sell-on-the-news syndrome on Tuesday afternoon,” said Larry Wachtel, market analysts at Prudential Securities.
“When you’re bereft of ideas, and you focus on a single event like the Fed’s cut, it really never works because the single event always turns anticlimactic,” he said.
What triggered the last-minute nervousness all across Wall Street was a trickle of good news on Friday that indicated consumers are more confident than most economists anticipated and are spending in stores this spring more briskly than expected.
If the economy improves, investors fret, Greenspan won’t be as aggressive in making his fifth – and possibly last – rate cut this year.
Investors already have factored a half-point rate cut into the price of stocks; anything less would likely trigger a sharp drop.
Greenspan’s last four rate cuts in the first quarter sent stocks rebounding, big-time.
“What’s happened here is that you’ve got stocks up to a level where they couldn’t go any higher, and the only catalyst is the Fed meeting,” said Wachtel.
“People are saying [Greenspan] is going to cut only 25 basis points and not 50 basis points – so we’re left with an inability to buy. And with no one buying, stocks are falling from their own weight. Those big gains we had are an oversold moon shot that’s rendered the markets very vulnerable.”
Some economists say there’s plenty of bad economic news to make Greenspan stay on track with his anticipated half-point cut.
“Greenspan will do whatever it takes to make sure the economy skirts recession,” said Brian Nottage, an economist at Economy.com. “The stronger retail sales show that consumers are more resilient than believed, but we’re still not out of the woods by any means.”
He said, “The Fed is aware that those retail sales won’t be sustained if the job market continues to deteriorate.”
Companies have laid off more than 500,000 employees this year and expect still more layoffs.
“We’re seeing job weakness spreading across the country, and the Fed has to be concerned how that’s going to be played out in the next few months,” said Nottage.
Nottage added, “I believe the Fed will do the 50 basis points just as insurance, and that’s pretty good insurance.”
Another factor that comes into play is the Bush tax cut package.
“If the government injects $100 billion into the economy as immediate rebates as early as October – that’s 1 percent of the Gross Domestic Product,” Nottage said.
“People are going to spend it, and this is an immediate boost to the economy.”
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Cut 50 to 4.0 or fight!
Strong economic numbers out late last week made some Fed watchers nervous that Alan Greenspan and the Fed governors may cut interest rates by only 25 basis points on Tuesday.
If the Fed doesn’t cut 50 basis points – half a percentage point – to a 4.0 percent Fed Funds rate, it could have some problems on its hands.
HERE’S WHY:
* The stock market would take a big hit as the cost to companies of borrowing money and expanding would not drop as much as expected.
* The bond market, which has already been jittery, would go haywire and some long-term interest rates might actually rise.
* The Bush White House might be unhappy because it wants interest rates to be as low as possible to spur expansion and boost home ownership.