Fed Expected to Cut Rates – Stocks Surge

The economy is slowing, and energy prices seem to be poised to go through the roof, but stocks are improving on hopes that an interest rate cut by the Fed will spark economic activity.

Even as oil prices have gone over $93, the DOW average improved nearly fifty points. This can mostly be attributed to widely held expectations that the Fed will cut the right by at least 1/4%. Back in September the Fed cut the rate by .5%. It’s not widely believed that this cut will be as big, but hopes are high that there will be a corresponding spike in lending and spending.

“It’s kind of a psychological sort of move,” Wren said. “A 25 basis-point cut isn’t going to ease the credit crunch. But it’ll give the Fed a little more time to figure out what’s going on with the economy.*”

So said Scot Wren, an equity analyst and strategist for a major US financial firm.

Optimism about the economy isn’t due entirely to the expected drop in interest rates. Several huge companies are also reporting increases in profits in spite of a sluggish economy. That kind of result in the face of generally adverse conditions gives investors hope, and encourages them to buy.

This story illustrates the huge factor human emotion plays in the movement and success of markets. Many of us may think that markets have a mind of their own, and individual outlooks aren’t a big factor. But you have to realize that every person has a perspective and when you aggregate those perspectives what you get is the ebb and flow of markets in general. That’s why in can be so dangerous to follow the crowd in your investing strategy.

It seems that there isn’t as much cause for panic as some would have us believe.