So just last night, the US Feds declared that they will be cutting the interest rates by a quarter point. You may read more about it here. However, I just wanted to point out this excerpt from the article that I found rather interesting.
What does this mean?
Essentially, investors are all cheering for a rate cut. However, what does a rate cut truly mean?
Do we not only see rate cuts when the economy is in a decline and that the Central Banks have to step in by doing quantitative easing?
So then, why would investors be cheering for that?
Howard Mark described this the best – If you went to the doctor for an ailment and he pulled out a huge hypodermic needle, would you take that as good news or bad?
The rate cuts is the same thing. Why would market be cheering for that huge hypodermic needle?
While a rate cut is no indication that markets are going to be declining any time soon. However, I just wanted to point out the mindset of the market in this instance and how peculiar it is. Instead of focusing on the fundamentals of the economy, people are instead focusing on whether there will be economic stimulus in the form of rate cuts.