Understanding Stocks

WHAT MAKES STOCKS GO UP OR DOWN 151
the real estate market boomed, and many people took the opportunity
to refinance their homes.
If you are watching the stock market, it is always a big deal if the
Fed raises or lowers interest rates. The market may rally on news of a
rate cut or fall on news of a rise in the rates. Often, the market moves
dramatically in advance of a Fed decision.
There is something else you should know about the Fed. Technically,
it isn’t supposed to care about the stock market, and if you ask the
board members, they will say that they are not influenced by the market.
But it’s an open secret that they do pay attention. If the Fed hadn’t
intervened with drastic interest rate cuts, the market might have gone
down a lot faster and farther than it did. The bottom line is, if you are in
the stock market, you should pay attention to what the Fed does.
The Dollar: I’m Falling and I Can’t Get Up
One economic indicator that you should keep your eye on is the dollar.
When the dollar is strong against other currencies, like the yen and the
euro, foreign investors will buy our Treasuries and invest in our stock
market. That’s the good news. The bad news is that the strong dollar
makes our goods undesirable to foreigners because they are so expensive.
A strong dollar also makes it hard for people to travel to the United
States because it is so expensive.
On the other hand, when the dollar is falling and is weak against
other currencies, foreigners pull their money out of our stock market.
(Basically, they get hit twice, once when their U.S. stocks fall in price,
and again when they lose money on the currency.) As the dollar falls, the
stock market tends to go down in price. This is also not a good time to
travel overseas, as it will be more expensive. Perhaps the only positive
thing that comes from a weak dollar is that foreigners can now afford to
buy our goods and services, which pleases American manufacturers.
If you are in the markets, keep your eye on the strength or weakness
of the dollar. If you see the dollar falling, as it did in 2002, this is a clue
that foreign investors may get spooked and begin pulling their money
out of our stock market.