Sunday, September 16, 2007

How will the stock market react if the Fed doesn't cut rates on Tuesday

An article in USA TODAY by Adam Shell and Matt Krantz entitled "Stocks' fate hangs on Bernanke's move" discusses how the stock market may react depending on what the Fed decides on Tuesday. They also include the unpopular scenario of the Fed leaving rates unchanged:

•If there is no cut:

This is the most bearish potential outcome of all the scenarios, as investors will not only be greatly disappointed but might conclude the Fed is not being nearly aggressive enough to avoid a more serious economic and financial event.

"It's the most forecasted rate cut in history. If they don't cut, expect a 500-point drop in minutes," warns Gary Kaltbaum, president of Kaltbaum & Associates. Kaltbaum thinks the Fed is way behind where it should be in the rate-cutting cycle, noting that the fed funds rate is more than three-quarters of a percentage point above the yield on the 10-year Treasury note. He thinks the Fed should drop rates "a full point."

The Dow could test the lows hit in August.

And if the sell-off in mid-July — when fears of the credit crunch first surfaced — is a guide, investors shouldn't expect there to be many havens if cuts don't happen. All 10 of the market sectors have lost ground since the July 19 market peak, Stovall says.

I have no doubt that the stock market would give a very severe negative knee-jerk reaction if and when the Fed goes public with my forecast action of no change in rates, but that would be mostly the reaction of traders and short-term speculators and loud-mouthed commentators. It would take several days to a week for true investors to respond, and two weeks later the reaction to the decision will be ancient history.

At a minimum, a no-change decision would give us the most interesting response.

-- Jack Krupansky


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