If you haven't checked your stocks yet today, now's a good time to do so. Odds are you're going to be very, very happy.
That's because the Federal Open Market Committee (FOMC) decided to cut the federal funds rate 50 basis points -- all the way down to 4.75%. The entire market jumped on the news. Mega-cap giants such as $500 billion ExxonMobil (NYSE: XOM) and $425 billion General Electric (NYSE: GE) spiked like penny stocks after a spam assault.
But what does the cut actually mean?
Besides making money a little cheaper to come by, it doesn't mean a whole lot for individual investors who are focused on the long term.
Ben Bernanke, market manipulator
Thomson Financial pointed out in a report earlier this week that equity prices have historically not responded to 25-basis-point cuts. It takes a 50-basis-point cut to really put a charge into stocks.
The Fed knows this. So what did it do? It cut the rate 50 basis points ... and put a charge into stocks. And while the rate cut removes some uncertainty from the markets, it does not mean stocks are a better buy today than they were yesterday. That's particularly true if you believe -- as we do here at the Fool -- that the value of an equity is determined by its cash-generating abilities over the next decade or more.
What a rate cut cannot do
A rate cut does not change the fact that Eastman Kodak (NYSE: EK) is poorly run and struggling to adapt to new technology -- and yet it's up nearly 2% today. A rate cut does not change the fact that Ford (NYSE: F) and General Motors (NYSE: GM) have a whole lot of work in front of them before they can shore up their balance sheets and truly compete with Toyota -- and yet both Ford and GM immediately jumped nearly 2%.
And a rate cut certainly does not change the fact that both Sirius Satellite Radio (Nasdaq: SIRI) and XM Satellite Radio (Nasdaq: XMSR) are losing money and may not be allowed to merge -- yet they too traded up sharply on the news.
If you truly want to make your fortune in the stock market, tune out the noise of everyday news. Instead, focus on companies on the most fundamental level. That means sifting through filings to find the best-run companies, determining good prices at which to buy shares, and then holding and even buying more during inevitable market volatility.
After all, the Fed could have decided to hold rates steady and stocks would have plunged -- and yet the fates of Kodak, Ford, GM, and satellite radio would still be in the hands of their management teams.
Trade smart
At our Motley Fool Stock Advisor investing service, Fool co-founders David and Tom Gardner seek out the world's best public companies and tell their subscribers to buy them and hold them for decades. Five years out, the brothers are ahead of the S&P 500 by 40 percentage points on average. And while today's cut has certainly helped our scorecard, we also would have been fine without it.
If you'd like to take a look at the stocks David and Tom are recommending for new money now, click here to try Stock Advisor free for 30 days. There is no obligation to subscribe.
Tim Hanson does not own shares of any company mentioned. The Motley Fool has an emotional disclosure policy.
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