Post from: EveryJoe

How Will Tomorrow’s Fed Rate Cut Affect You?

Fed rate cut and the stock market

Yesterday saw the single biggest gain by the Dow in close on five years. Stocks are going ballistic right now, with investors thrilled by the Fed rate cut. Why? Because now money costs less. Companies can borrow at lower rates, meaning that they spend less in interest charges. This means that the money goes to profits, boosting share prices.

Additionally, the Fed rate cut essentially said to investors: “The Fed is here to help. We won’t let the economy fail.” This means more confidence and higher risk appetite. So more people are buying stocks.

If you bought some stocks earlier, as the Dow was in the depths of despair (or what amounts to it these days), you are probably very happy right now. The turnaround means bigger returns. The same is true for your dollar-cost averaging retirement account (though to a lesser degree and with a smaller impact). And, if you have a lower emotional risk tolerance, you are probably breathing easier with this proof, once again, that over the long term the stock market comes out ahead.

Bond market and the Fed rate cut

The bond market usually moves opposite to the stock market. As Reuters points out:

“Bonds are down. It looks like the stock market rally is going to continue today,” said Richard Huber, economist at A.G. Edwards and Sons in St. Louis, Missouri.

So, that means that if you bought the long-term Treasuries not too long ago, you are in a good place since the yield has dropped (and you locked it in before). Now may not be the most auspicious time to buy, since inflation concerns are emerging, and that can erode the value of bonds.

Housing market and the Fed rate cut

Even the Fed rate cut may not be enough to stave off a housing recession. Of course, the main idea was to reduce the impacts from an economy-wide recession, limiting most of the damage to the housing market. While some mortgage rates are dropping (especially helped will be jumbo loans), many people won’t actually benefit from the Fed rate cut in terms of home mortgages.

Those most likely to benefit from the Fed rate cut are those whose mortgages will reset to higher rates (and payments) in the next year. While the payments will be higher, they won’t be as high, and that small difference may save a few thousand people from foreclosure by making the new mortgage payments manageable.

Unfortunately for those saddled with subprime loans, the Fed rate cut is unlikely to help a whole lot. Rates may drop, but they’ll still be high. And with poor credit, many may not qualify to refinance out of a subprime loan. And, if even they do manage to qualify, the other issue is prepayment penalties. Many a subprime loan comes with these penalties that make it too expensive for most people to refinance.

Other effects of the Fed rate cut

Credit card interest rates are likely to drop (although they’ve already been raised) slightly on this news, and you will find that the forex market (if you’re into that sort of thing) is doing well. Commodities are seeing an interesting effect, with inflation fears leading to increased investment in gold and other precious metals, as well as rising oil prices (which actually could be causing inflation fears as well — it’s a vicious cycle with oil prices).

So, right now, the “safer” investments are the ones struggling. Riskier investments tend to be returning more, and risk appetite is on the rise. But be careful. Even though it may seem bullish today, the next crisis could take it bearish. Make sure your investments are well-diversified.

Post from: EveryJoe

Fed Rate Cut Affects a Variety of Markets — And Possibly You