Equity investors trust Fed
The stock market rally was concentrated on Monday when equity investors expected the Fed to cut rates, as well as Tuesday when the Fed satisfied expectations and reduced the federal funds rate target by 50 basis points. Activity from Wednesday to Friday was less robust, but the stock market managed to hold on to the early week's gains. Generally, equity investors are assuming that the monetary policy stimulus will take hold sometime in the spring - as well fiscal policy stimulus. So far, equity investors appear to be ignoring current data in favor of forecasts about a better (higher profits) future. It is likely, though, that investors will need to see at least some friendly news that supports economic recovery. Thursday's jobless claims showed two straight weekly declines. On Friday, the University of Michigan reported that its consumer sentiment index continued to inch forward in early November. But these are only small signs. Investors will need more in order to sustain the rally.

Fed rate cut helps lower Treasury yields
The Fed's 50 basis point reduction in the federal funds rate target on Tuesday was friendly news for the bond market and helped dampen yields across the maturity spectrum. Bond investors generally expect additional rate cuts, whether the Fed acts again at the December meeting or in the first quarter of 2002. Economic data remain anemic and inflation is not a problem.