Wednesday, March 19, 2008

Is Wall Street Nuts?

There's a lot of goofy talk (imagine!) about why the stock market went up so much. A commenter at Balloon Juice had a pretty good take.......

It’s a herd mentality at work. The Fed cut 75 bps. In a black box, this should be good for equities. Money is cheaper, overall cost of capital goes down etc. Given the real and/or perceived liquidity issues facing the financial markets, the spectre of inflation such a move would cause has taken a back seat. Inflation is yesterday’s worry. For now.
Obviously, there is more to it than that. The see-sawing in the market we have been seeing the past few months is overreaction to different sets of conflicting news. The market should not have risen that much today nor should it have fallen so much at the end of last week when Bear unraveled. Confidence in the market is weak right and it appears to be amplifying movements quite a bit.

I'd add that lower interest rates generally make bonds and related securities less attractive long-term investments than stocks. At least some stocks theoretically also handle inflation better because the company's revenues and earnings go up with everything else. As with everything else being said, though, in the current climate it can all go out the window.

I knew those years working at a PBS station watching Wall Street Week with Louis Rukeyser
would come in handy someday!

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