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A strange thing happened after the Federal Reserve, the US central bank, announced its sixth rate cut of the year: nothing. Before and after the other five rate cuts this year the stock market reacted with gusto. This time, there was hardly a flicker of recognition.
That is how it should be. Interest rate cuts aren't there to provide immediate and false relief to the stock market; they don't have the power suddenly to make bad corporate earnings disappear, or to reverse the losses suffered by millions of investors, retail and institutional, who threw their money at poor companies. And it looks as if market participants have finally learnt what is in essence Fed rate cuts lesson 101.
Stocks rocketed ahead after the Fed's exceptionally well-timed first rate cut at the start of January. But that wasn't done for the stock market's benefit; rather its purpose was to stave off an impending credit crunch that had been brewing since the latter half of 2000. A series of defaults on loans and commercial paper programmes by companies regarded just months before as solid investment-grade credits had forced spreads to their widest levels in living memory.
A rate cut outside of the normal Fed calendar, with the promise of more to come, was enough to reverse that trend almost immediately, and permit sound companies to maintain access to funding.

Future rate cuts reinforced this, but did nothing for share prices. In fact, both major indices stand below where they were when the Fed began to cut rates: the Dow Jones Industrials Average is down 3.25%, the Nasdaq Composite down 16%.
The simple fact is that corporate America is in trouble, has been for nearly a year and there is no end in sight. Tech firms continue to shed more jobs, banks are starting to report worsening results, and all the while consumers continue to spend and rack up more debt.
It has the makings of a messy recession, and stems in part from a mis-placed faith in the economy in general to rebound and the Fed in particular to manage the process. What we're seeing now is the gradual realization, despite all the clear signs from the Nasdaq crash in March and April last year onwards, that this simply isn't going to happen.
Yet the markets still cling to any glimmer of hope. The day after the market's non-reaction to the Fed rate cut, stocks soared when a judge announced that Microsoft would not, after all, be forced to break up as a result of its anti-trust case last year. That's as likely to improve corporate profits in the US as to improve the chances of snow falling in the Sahara.

Bank deleveraging has barely started

Cash management poll 2008:

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