Wall Street Cheers the Fed

The stock market’s verdict so far on the Fed’s change of mind on interest rates: It might just save the day.

The Dow Jones industrial average shot up 6.6% last week, or 517.24 points, to end Friday at 8,416.76. That put the blue-chip index back about where it was on Aug. 14 and cut the Dow’s loss from its 1998 record high to 9.9%.

But the broader market remains well off its highs. The Standard & Poor’s 500 index, while up 7.3% last week, still is down 11% from its 1998 peak. The New York Stock Exchange composite is down 13.1% from its peak, and the Russell 2,000 index of smaller stocks, up 7.7% last week, remains down 30% from its record high.

The market faces a number of major challenges in keeping the rally going, even assuming the Fed cuts interest rates again before year’s end. For one thing, tax-loss-related selling is still in high gear as investors clean losers out of their portfolios. What’s more, fresh weakness in the dollar--as the Fed presses rates lower--could make many foreign investors balk at taking a chance in U.S. equities. Most important, earnings growth has slowed for many companies and is expected to continue slowing into 1999.

Still, an accommodative Fed has always been the stock market’s best friend. At the very least, easier Fed credit could put a higher floor under stocks from here.