BEFORE YOU CAN SEE FIREWORKS, it's got to get dark. And, sure enough, before stocks whistled brightly skyward Thursday both before and after the Federal Reserve's latest interest-rate decision, it had gotten rather dusky.
Investors, on the defensive for the past six weeks, had been braced for more disappointment. After more than a year of prematurely insisting that the Fed was about done lifting the cost of short-term money, some mainstream economists had reversed and began predicting lots more to go -- perhaps a half-point Thursday instead of a quarter. A couple of banks forecast overnight money at 6% by yearend.
In the end, short rates were bumped up a quarter-point, to 5.25%, and the Fed cutely altered its statement to invite speculation that it might not move again in August.
The Fed news arrived at a time when short-term indications of investor nervousness were all about, as described here in recent weeks, and after a stretch featuring one of the narrowest 10-day index ranges in history. Short-interest totals had risen smartly, along with trading volumes. Defensive hedging had bulged. Money flowed out of stock mutual funds.
The Nasdaq and Standard & Poor's 500 did even better than the Dow. Each made all and more of their weekly gain on that one day. The Dow added 1.5% on the week, to reach 11,150, the S&P rose 2%, to 1270, and the Nasdaq jumped 2.4%, to 2172. The Dow gained a fraction for the second quarter, while the S&P dipped 1.9% and the Nasdaq sagged 7.2%.
Though impressive, and helpful in working off some of the pessimism that had built up, Thursday's surge wasn't enough to justify declarations that any kind of summer rally is under way.
If the market can hang tough or push higher still during the holiday week, fresh distractions will quickly come in the form of earnings season.
There's a gathering consensus among technically oriented market analysts -- maybe too cozy a consensus? -- that any rally will fall short of the old highs (1325 on the S&P, up 4.3% from here), that it's not a pop worth chasing, that the market will test the recent lows and maybe break them. As Barron's has noted ("Waking the Bear," June 26), this camp also thinks a bear market may well have started.
Meanwhile, the more fundamentally oriented, as a rule, think the market is cheap, earnings are peachy and stocks likely to rip higher once the Fed steps aside, though this isn't what history would suggest.
A recipe, perhaps, for still more mutually assured frustration -- no immediate downside gut check, but also no resolution of the Fed's intentions that the bulls are so avidly awaiting.
IT'S HARD TO MISS THE IMPATIENT hunt for scapegoats around the Street, and perhaps it says something about the mood among investors and the public at this market moment.
Last week saw hedge funds placed on mock trial in a congressional hearing room (see Roundtable Rascals?), a venue once reserved for investigating treasonous acts or criminal enterprises. The forum featured several critics casting ominous but vague charges about the funds' rapacious tactics and nefarious motives.
Earlier in the week came news that a couple of trading firms were suing several major brokerage houses, charging them with abetting "naked" short selling -- that is, selling shares short without first arranging to borrow them. This practice is improper, but the suggestion that the largest brokers are conspiring to encourage it indicates a certain inflated sense of grievance among those thrashing for villains to blame when their stocks go down.
Outside the legal sphere, the blaming of the Fed (before Thursday) for upsetting the market got pretty shrill. Early last week, two eminent Wall Street veterans -- Steven Einhorn of Omega Advisors and Ed Yardeni of Oak Associates -- sent around a plaintive take on the Fed's supposed offenses.
"In our opinion, Fed officials are unnecessarily, and perhaps dangerously, destabilizing global capital markets by exaggerating the inflation problem and how they are likely to respond to it," the statement began.