A wild ride on the stock market roller coaster
Monday was the only good day for the stock market, a day of high expectations for the 75 basis point cut. By Tuesday hopes were crushed when the Fed came in with a 50 basis point rate cut instead. The statement accompanying the rate reduction implied that the Fed stood ready to reduce rates again should conditions warrant. Indeed, this implied that Fed officials were likely to reduce rates before the next scheduled FOMC meeting in mid-May. Nevertheless, hopes for 75 were dashed and markets sank…and sank…and sank. On Thursday afternoon, stock indices staged an impressive comeback when investor optimism seemed to turn around amid renewed hopes for a profit-growth rebound in the second half of the year. Despite the comeback, stock prices still declined on Thursday. But the optimism held and a mini-rally ensued on Friday as well. Given the amount bloodletting during the week, the size of Friday's rise was nothing to write home about. Yet, perhaps it could signal that investor sentiment is finally turning around. Next week will be the test.

Having plunged for a month, the Nasdaq composite index managed to post a 2-percent gain for the week. The Russell 2000 gained a smidge from last Friday. The biggest loser this week was the Dow Jones Industrial Average. The chart above depicts the various market indices relative to the 12/31/00 close. Notice that the best behaved index is the small capitalization index (Russell 2000). The Dow and the S&P 500 follow closely behind. The Nasdaq is still down more than 20 percent from year end.

Treasury market rally
The Treasury securities market had a much better week than the stock market. Whenever the stock market is in the tank, investors shift to less risky investments. The flight-to-quality bid allowed bond prices to rise and yields to drop, particularly on the shorter end of the maturity spectrum. By week's end, some improvement in the stock market led to a drop in bond prices - and a pick-up in yields. As a result, yields actually rose from last Friday's close. In any case, bond investors are pricing in another 50 basis point rate cut for mid-April. Consequently, yields on short-term instruments such as the 3- and 6-month bills are down nearly 25 basis points from a week ago.