If you haven't checked your stocks recently, 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 back on Sept. 18 -- all the way down to 4.75%. The entire market jumped on the news and has risen 5% in less than a month. Mega-cap giants such as ConocoPhillips
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 released prior to the Fed's move 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 six weeks ago. 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 put a new drug in Genentech's
Yet each one of these names jumped more than 2% on the day the Fed cut the funds rate.
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 Genentech, Southwest, First Solar, and Research In Motion would still be in the hands of their management teams.
Trade smart
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This article was originally published Sept. 18, 2007. It has been updated.
Tim Hanson does not own shares of any company mentioned. JPMorgan is a Motley Fool Income Investor recommendation. The Motley Fool has an emotional disclosure policy.
