After a steady slump in world trading, global markets surged Tuesday after expectations of a likely Federal Reserve interest rate cut and the Treasury's move to inject capital boosted investors' confidence. A Business Week editor probes the reasons behind the surge.
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The Dow Jones Industrial Average did close up a whopping 889 points today. The question is, why?
And we pose it to Jim Ellis, the assistant managing editor of BusinessWeek magazine in New York.
Jim Ellis, welcome.
JIM ELLIS, BusinessWeek Magazine:
What happened, Jim? That was unexpected. What happened?
It was unexpected. I mean, there was a confluence of sort of good news.
First of all, a lot of investors woke up after the weekend and figured out that there's real value in this market. I mean, Warren Buffett's been saying it for a couple of weeks, but people are looking at the value — the way we value markets is what times earnings are stocks selling at? Right now, it's about less than half of what it was last October.
So people were seeing that they could pick up stocks like Alcoa for less than five times earnings. The entire market is selling for less than 11 times earnings. It would have been closer to 25 or 30 just a year ago. So that was one reason.
The second reason was that people are finally convinced that international central banks are really serious about putting a floor under the banking business. That's a good thing. It means that the financial system won't totally collapse.
And then, lastly, we're seeing some real hope now that interest rates for credit are actually starting to come down. Banks are more willing to lend to one another and in the LIBOR rate and the rate that banks use to lend to one another in London is coming down.
And this morning, both the Bank of England and the Swiss National Bank offered $20 billion to their own banks to prop them up. Only $10 billion was requested. That means that banks are finally finding other ways, market ways to support themselves, rather than having to go out and, you know, basically put their hand out for the federal treasury.
And the Federal Reserve here in the United States is supposed to — is expected to lower interest rates again tomorrow, correct?
Right. I mean, the big question now is not whether it's going to happen, but how much? In other words, will the Fed go down a half point, which most people expect, though, in the financial futures markets, there's a 40 percent bet now that the Fed might actually drop three-quarters of a point.
That's unprecedented. And it also is going to — it might put us down below 1 percent interest, which is amazing.