Money & Investing - Banks.com

This morning President Bush held a news conference to address a variety of issues, most notably the economy (but without using the word “recession“). As investors gear up for tomorrow’s expected Fed rate cut, as well as inflation data on Thursday and jobs data and Friday, President Bush assured us that measures are being taken to stimulate the economy (including the tax rebate).

The economic data, as well as the response to the president’s remarks on the economy this morning, will affect a variety of markets, from stocks to bonds to currencies to commodities. When you go to make investments, it is important that you consider economic data, as well as the rhetoric used by leaders.

President Bush addressed the issues associated with the housing market, as well as those associated with rising oil prices and with food prices inflation. A great deal of the president’s talk of the economy focused on energy costs, and ways he thinks that we can stimulate the economy by lowering energy prices.

President Bush also pressed Congress on the economy, intimating that it is the fault of the Democrat-led Congress that the economy is having problems. The New York Times reports on today’s remarks by President Bush on the economy:

Speaking at a news conference in the White House Rose Garden Tuesday morning, President Bush issued a sweeping indictment of the Democratic-led Congress, essentially blaming the sputtering economy on what he characterized as the House’s failure to propose “sensible” bills that he could sign into law. …

“On all these issues, the American people are looking to their leaders to come together and act responsibly,” he said. “I don’t think this is too much to ask even in an election year.”

While today’s remarks will likely have an effect on the stock market and other markets, it is worth noting that the Fed rate cut tomorrow, as well as worries that it will be the last for quite some time, are more likely to affect the stock market — and other markets as well.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss.

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I encourage reader questions here at the Banks.com investing blog, and I am excited to answer the first question I have received:

There is big news about a Fed rate cut later today [March 18, 2008], and how investors are getting excited about it. It doesn’t seem to have a real connection in my mind. What do interest rates have to do with the stock market?

Yes, the Fed rate cut yesterday resulted in a stock market rally. Directly, interest rates have very little to do with the stock market. However, there are immense psychological and chain-reaction effects between interest rates and the stock market.

Lower interest rates make borrowing less expensive

Just as lower interest rates help your variable credit card rate drop, the cost of borrowing for businesses goes down as well. This means that it is possible for growing companies to borrow money for expansion more cheaply. This means that there could be more capital leftover in the company, or it could mean that the company can finance more. Either way, it is seen as a way to increase future earnings and profits. And that means higher stock prices.

Lower interest rates lead to more investing in the stock market

Investors use different instruments to make money. One of these are bonds, which allow investors to make money from interest. Lower interest rates mean that bonds are less profitable for investors, so they are more likely to shift their investing dollars into the stock market. This increased demand lifts stock prices.

As mentioned before, these are not direct effects. Lower interest rates merely set off a certain line of thinking that (usually) leads to gains on the stock market. It’s mostly psychological, as many investors see it as beneficial to the economy. And, as we have seen in recent months, group psychology often leads to very real-world consequences.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional.

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