posted on January 4, 2001 09:17:52 AM new
I'm proclaiming my ignorance of the stock market and was hoping maybe someone could explain this to me.
The NASDAQ has been dropping like crazy lately. I'm guessing that that is because the value of tech stocks is falling and many dot coms are going under.
Now, yesterday the Fed lowered the interest rate to 6 percent from 6.5 and the markets flew up again.
Is that 6 percent mortgages? Cars? What is the 6 percent and how does .5 benefit anyone?
Did people decided that that extra .5 percent makes tech stocks worth more and they went on a buying frenzy?
I just don't understand any of this. If anyone has a minute and could give a brief explanation of what's happening, I'd really appreciate it.
posted on January 4, 2001 09:44:34 AM new
No one, not even brokers, can be certain of all the factors that drive the market. The recent downturn of both the NASDAQ and the Dow have as much, or more to do with the recent political turnover as they do with tech stocks. Changing a president leaves businesses somewhat uncertain as to what policy will be in the future, and hence they are more reluctant to invest.
The lowering of the Federal interest rates means that banks will pay the lower rate when they borrow money. This means that they can offer lower rates (bank rate plus a couple of points) to consumers. Lower interest rates spur the economy by encouraging consumers to spend money. This in turn gives some reassurance to the market, and stocks go up.
The stock market long term is a very stable thing. Short-term changes, even dramatic ones are often hard to predict. Often, your guess is as good as a professional's.
For all you "experts" out there, I realize that this is an oversimplification of matters, so don't gang up on me.
posted on January 4, 2001 10:20:13 AM new
All interest rates are interconnected. The Fed rate cut starts a chain reaction which lowers other interest rates.
Lower interest rates (good news) = stock market goes up
Higher interest rates (bad news) = stock market goes down
Lower interest rates means more borrowing. More borrowing means more money floating around for spending by both businesses and individuals. However, if you lower interest rates too much and there is too much money floating around, inflation can become a problem and your dollars have less real buying power.
Higher interest rates are usually a signal that there is concern about inflation.
