Yesterday, as expected, Bennie and his Jets (i.e., Ben Bernanke and his Board of Governors at the Fed) slashed the federal funds rate. That was widely expected, of course, but what caught quite a few folks off guard was the supersized cut the Fed delivered. With the inflation genie apparently back in the bottle (for now), the Fed felt free to reduce the rate banks charge one another for short-term loans to a target range of 0% to 0.25%
The market was thrilled, naturally enough. All sectors were up dramatically, but financial companies -- whose profit margins are crimped when they have to pay more for the money they borrow, lend, or keep on hand -- shot up the most. Indeed, the Financial Select Sector SPDR (XLF) -- an exchange-traded fund whose top holdings include Wells Fargo
Materials and tech companies also fared well yesterday -- a strong indication of just what cheaper money can do for the bottom lines of such companies as Monsanto
Stop me if you've heard this one before
We've seen this film numerous times during this winter of investor discontent. And so far, we haven't made it to the second reel, with Fed-fueled, monetary-policy rallies proving short-lived. The same has so far been true on the fiscal-stimulus side of the ledger. Remember those rebate checks from back in the spring?
Neither, apparently, does the market.
With that as a backdrop, one of two things is likely true. The first is that perhaps the apocalyptic types are right: The end times for capitalism (and therefore investing as we know it) really are nigh. The traditional measures the government has taken -- outsized though they have been -- are way too little, way too late. Game over player one.
The second possibility, however, is that at some point these measures will indeed kick in, perhaps with the force of a tsunami given just how aggressive they've been. And that, um, aggression may continue, with Bernanke vowing to use "all available tools" to stoke the economy's engines. Translation: The government is clearly freaked out, and rightly so. Sinking further into recession will have a ripple effect, with higher unemployment leading to shrinking tax revenues and, consequently, to greater levels of deficit-spending.
My money -- literally -- is on the second outcome. I'm about as fully invested as a guy with a mortgage and a baby on the way should ever be. And I'm confident, moreover, that like every other downturn we've experienced, this too shall pass. To be sure, if I had a crystal ball, I might have timed my purchases more accurately, yanking money out of the market in October 2007 and rushing back in this past November when the Dow hovered briefly around the 7500 mark.
If you have a functioning crystal ball, good for you. For the rest of us, the smart move is to winnow the vast universe of investment possibilities down to a manageable group of investments. Cherry-picked mutual funds helmed by proven money-makers are a no-brainer for a portfolio's foundation. Once that's in place, you'll then be in good position to venture out into the world of individual stocks, focusing, I'd suggest, on profitable companies with healthy levels of free cash flow and management teams that have delivered the goods for shareholders over the course of many years.
The Foolish bottom line
As it happens, that's precisely what we've done at the Fool's Ready-Made Millionaire service. Our compact lineup of just eight holdings comprises the cream of the mutual fund industry's crop, a high-octane ETF, and four individual companies that are firing on all fundamental cylinders during this, the toughest market to navigate in decades.
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Shannon Zimmerman is the lead analyst for the Fool's Ready-Made Millionaire service and doesn't own any of the companies mentioned. Bank of America and Dow Chemical are Motley Fool Income Investor choices. Microsoft is an Inside Value selection. The Fool has a strict disclosure policy.