Rate Cut By Global Central Banks Is Mainly A Symbolic Move

As part of a global coordinated move, the Federal Reserve cut interest rates by 50 basis points this morning. The European Central Bank (ECB), Bank of England (BOE) and the Chinese, Swiss, Canadian and Swedish central banks also cut rates.

The target for the federal funds rate is now 1.5%, and the discount rate is set at 1.75%. The ECB lowered its rate to 3.75% and the Bank of England reduced to 4.5%. Both the ECB and BOE made 50 basis-point cuts.

In Asia, China lowered by 27 basis points. The Bank of Japan, which has rates at 0.5%, did not cut, but expressed support for the global action.

U.S. stock futures rose following the 7 a.m. ET announcement, and European shares pared their losses.

Today’s action is largely symbolic, since interest rate policy was never the problem. Rather, a lack of trust on the part of lenders is the issue. However, many saw cutting rates as a sign that the central banks are willing to do whatever it takes to loosen the credit crunch.

I’m glad to see today’s move, but it seems, to a certain extent, a day late and dollar short. A full percentage point cut on Monday morning would have been much more powerful. Still, it’s another positive step and I’ll give the central banks credit for doing something.

The rate cut lowers the amount of interest that banks will pay on savings accounts. It also negatively impacts money market accounts. However, we remain far from an environment where it is safe to chase higher yields. Investors would be better served to preserve capital than to seek a higher yield for the time being.

From a stock investing standpoint, we won’t know if today’s action allows the market to set a bottom or not until after the fact. There is a tremendous level of fear out there right now, and many good stocks have been unfairly beaten down. Dollar-cost averaging (meaning buying shares over several months instead all in one transaction) is prudent strategy. It gives you exposure to any rebound, while lessening your risk to any more potential downside.

I would look at large-cap companies and seek out a mix of different industries. Among the companies I expect good earnings from are General Dynamics (GD), CSX (CSX), Becton Dickinson (BDX) and Smith International (SII).

Similarly, I would look at the companies within your portfolio and ask if the reasons you first bought them still apply. If the answer is no, sell them. Regardless of market conditions, you always have the option to make changes to your portfolio. It is better to take a loss that you know and switch to a better quality investment than to risk an even larger loss.

Most importantly, pay attention to the tone of some of the market pontificators. Literally just a couple of months ago, many were calling for a rate hike before the end of the year. (I said publicly that there would not be a hike this year.) Now, many are warning about dogs and cats sleeping together. I cannot stress enough the importance of adhering to a strategy that has worked over the long-term: buying fundamentally sound companies with rising earnings estimates that are trading at attractive valuations.

If you are scared, don’t be afraid to pull some money, but not all, out of the market. (You want to be positioned to take advantage of the rebound when it occurs.) But, make sure you are making rational, non-emotional decisions. The markets and the economy are cyclical, and after every period of turmoil, sunshine and blue skies have appeared.

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