Please respond to Sivy on Stocks 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.

###

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