Coordinated rate cut does little for stocks
October 8, 2008 by Tisa Silver
Filed under Finance
I watched the Dow rise from 200+ points below to 30+ points above yesterday’s close in less than an hour. News of the synchronized central rate cut was supposed to set markets ablaze! What happened?
Well, I can’t quite comment on the effectiveness of this coordinated effort. Half of one day watching the stock market isn’t enough and I don’t believe the stock market can be used as a decent gauge for success anyway.
Rates affect the stock market because lower bond rates usually make stocks look more attractive. That’s why rate cuts are usually met with stock market rallies. But, I don’t think rates should dictate the stock market. The price of a company’s stock today should reflect the general consensus about the value of that company’s future cash flows.
This is not happening right now. Take a look at Coca Cola, which is one of the DJIA components. The stock hit a 52-week low on Monday and has since sunken deeper. On that day, the Dow tanked and one analyst downgraded Coke from “buy” to “hold.” But, what about the future of Coke justifies an 11 percent drop in this week alone? Or its 27 percent drop from its 52-week high on Jan. 10th?
Maybe Coke was overvalued, maybe currency conversion could be turning out of Coke’s favor but, the volatility is really telling. Not about Coke, but about just how seriously scared investors are right now.
Back to the rate cut. Perhaps unafforfable lending is not the problem. I think its more of a counterparty risk issue. Banks just don’t trust each other and even with affordable rates, they don’t want to lend. If banks have little to no confidence in lending (esp. with all of the Fed’s recent assistance and backing), why would anyone have confidence in the stock market? It has no guarantees, no insurance and right now no sense! Slightly after noon, the Dow was down 200 points again.
My advice: slow down and think big picture. This is bad (make that very bad) but it will pass. Look for solid companies and use this time to get in on some relatively cheap stocks. If you don’t need the money right away this could be the investment opportunity of a lifetime.
BTW, this is in no way an endorsement of Coke…I don’t even drink soda :)
