Fed rate cuts should be felt in months ahead

The bull market climbs "a wall of worry." Ponder that old Wall Street ex-pression, if you will.

Then think about all the economic worries that we are reminded of daily by the media. Here are a few: rising unemployment, interest rate cuts by the Fed not helping, earnings estimates being revised downward, companies filing for bankruptcy, no summer rally in the markets, the strong dollar hurting our exports, high energy prices, etc.

These are the kind of concerns that cause even experienced investors to be nervous even distraught, and which befuddle new investors, frequently causing them to postpone investing until "things look better."

Here's the problem with waiting for "things to look better." By the time that happens, the reluctant investor will be looking at much higher prices, at which time he will generally say something along the lines of, "The market has run up too fast. I'll wait for it to correct and then I will get in."

Folks, I've been doing this for 33 years, and I have yet to see the markets be that accommodating. Why? Because the markets are discounting mechanisms forward looking, if you will moving in expectation of what is likely to exist six to nine months down the road. So if you wait for all the perceived negatives to be removed, the six- to nine-month delay in acting can have a significant impact on your returns. (This cuts both ways, as evidenced by the speculators who owned the Internet-related issues and held that the new economy was different while evidence of an overall economic slowdown mounted, eventually leading to the decline of all the indices.)

If you are waiting for the good economic news before you put money into the markets, be prepared to forego the initial 20 percent to 30 percent gains that often are possible.

If, on the other hand, you are a disciplined, rational investor with a longer-term outlook, you have held many issues through this disquieting period and should be adding to your positions and/or initiating holdings of solid companies now. (Notice I did not say stocks, because I consider investments as partial ownership of sound, profitable companies.)

One component of the wall of worry that is getting a lot of press is the economic sluggishness that continues in spite of the Federal Reserve having lowered interest rates six times since the beginning of the year, a process that has historically helped revive the economy.

In this age of instant gratification there are those wringing their hands and bemoaning the fact that the Fed's cuts aren't working. (Lord, give me patience and do it now!) It helps to keep in mind the lag time that exists between Fed easing and signs of improvement. History shows that such a lag time is approximately the same as the discounting time I referred to above six to nine months.

With the first rate cut having been in January, we are approaching the point at which the effects should begin to be felt. From an investment standpoint, studies have shown that after five rate cuts (one fewer than we have had) stock prices have historically been higher six months to a year later.

How much higher? Average increases have been: for the Dow Jones 19 percent; the S&P 500 18 percent; the NASDAQ 21 percent; and the Russell 2000 25 percent. These are not predictions remember they are averages but they are indicators that while interest rate cuts work slowly, they do work.

"A rising tide floats all boats." You'll be hearing that expression in coming weeks. It's true of boats, but we aren't talking boats we're talking serious investing. Don't become enamored of the tech issues that are selling at prices 80 and 90 percent below their all-time highs. There are reasons for that, and it has to do with earnings, or rather the lack of earnings.

Concentrate on companies that do have earnings, a strong balance sheet, a low PEG, and under-representation in institutional/mutual fund portfolios. Understand what you own what the company does and why you own it and the circumstances under which you would replace it.

Study the companies, preferably using research from a source that has no corporate finance department conflict of interest, as I wrote about in my February column. It is not necessary to watch CNBC every day to follow the fortunes of your company if you have done your homework. If you don't want to do your homework, then get experienced professional help.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis In-vestment Advisors, a specialized mon-ey management company. Questions or comments can be directed to him by mail via The Springfield Business Journal, 313 Park Central West, 65806 or by e-mail at sbj@sbj.net.)