Rate cut not vital to rally markets

NEW YORK - Although the prospects for a late October interest rate cut have dimmed, the chances for a yearend stock rally still seem quite good.

Investors have been feeling more confident since the Federal Reserve cut rates a half percentage point on Sept. 18, and were looking for a repeat at the Fed's Oct. 30-31 meeting to keep stocks driving higher. But while a strong jobs report from the Labor Department lessened the likelihood of a rate cut this month, there's growing sentiment that one might not be needed for Wall Street to have its traditional fourth-quarter rally.

Market watchers believe upcoming reports might also point to a healthy economy, and might even help offset what is expected to be a sluggish earnings reporting season for U.S. companies.

"The Fed and the markets will be watching all the incoming data very closely, but it really seems unlikely we'll get enough negative data that will force them to once again lower rates," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "It will take an awful lot to bring the Fed off the sidelines, and we're heading into a historically strong part of the year."

Indeed, the Dow Jones industrial average has rallied during the final quarter for the past nine years straight. The Standard & Poor's 500 index has had a fourth-quarter sprint in 13 of the past 15 years.

The current optimism is a turnaround from Wall Street's mood of just over a month ago, when any rally seemed in jeopardy amid a harrowing tightening of credit, continuing erosion in the housing sector, and escalating energy prices. The Fed's half-point rate cut helped restore investors' faith in stocks and the economy overall.

Sheldon and other analysts say they aren't all that concerned about what the Fed does later this month. That's already been reflected in the futures that track the federal funds rate, which dropped from almost unanimous expectation for a cut to about a 50 percent chance.

"The market is really in a sweet spot for a number of reasons," said Todd Salamone, director of trading at Schaeffer's Investment Research in Cincinnati. "You felt a rate cut coming if there was bad data, and more confidence in the economy if there was good data. You really couldn't lose, and that's where we want to stay."

Much of the data out in the coming weeks will only partly reflect the effects of the Sept. 18 rate cut. Because of this, investors might have already discounted any bad news that might come out, Salamone said.