Quora Answer: Why are Stocks Going Up with an Expected Rate Cut?

The following is my answer to a Quora question: “Why are stocks going up with an expected rate cut?”

When the Federal Reserve cuts rates, it means one of two things.  The first is that they want to spur the economy, encouraging growth by providing cheap credit.  The second, is that they anticipate an economic slowdown, and they want to prevent the economy stalling or sliding into recession.  In this current climate, it is the latter, not the former.  The Trump administration’s zero-sum view of trade, softening demand in China, the shadow of Brexit, and an uncertain sociopolitical all point towards a global economic slowdown.

When the interest rate drops, so do the discount rates.  This boosts cashflow of healthy companies, even if only temporarily, in this case.  Some investors hope to extricate value from the stock through dividends or other means.  But should the economy not recover, due to the lower cost of business, the Federal Reserve, like any central bank, would have to resort to quantitative easing.  In such a case, either investors hold on for the long term, because of their confidence in the underlying fundamentals of the company; or they hope to sell in that small rally window.  It is in expectation of these scenarios that stocks are going up.