Economic reports were actually mixed this week. The odd part is that those indicators which came in line or turned out stronger than expected (real GDP, personal income and outlays) just seemed to frustrate equity investors, who are still waiting for signs of a recovery. Indicators that showed contraction (factory orders, PMAC survey) did so at a slowing rate and appeared to be viewed more favorably by market players.

Analysts and market players - and certainly media pundits - seem concerned that the Fed's rate cuts of the past eight months have not yet had a positive influence on the economy. It is surprising that more economists are not pointing out the long lag between a rate reduction and the subsequent impact on economic activity. In the old days, one wouldn't even expect any change in the economy before 9 - 12 months were completed. Even if we assume that lags are shorter in this "new economy" (although some economists will argue that lags haven't shortened at all), one would imagine that the initial rate cut in January would only now be felt in the economy. It will take several more months to feel the cumulative impact of the 300 basis points.

Market players are already anticipating that the Fed will reduce rates again at the October 3 FOMC meeting. Bond investors are looking for a 25 basis point cut. Perhaps the rate reduction will be friendly news for the bond market, but the equity market will only be happy when the Fed shifts its bias to neutral and raises expectations for an immediate upturn in the economy.