Barry Ritholtz says, A Bad Economy Could Spell Good News on Wall Street for Years to Come

The economic recovery isn’t as strong as first thought. Revised GDP figures released this morning show the economy grew at a 2.8% annualized pace in the third quarter, less than the 3.5% initially reported. The revision was in-line with expectations but shows the economy didn’t have as much momentum heading into the fourth quarter as previously believed.Unlike Wall Street traders, consumers seem to know the recovery is “anemic,” as Barry Ritholtz, CEO of Fusion IQ, describes it. The Conference Board’s latest confident survey shows Americans feel worse about the current economic situation than they did in March, when the stock market was making new lows. (Thanks to Dan Greenhaus of Miller Tabak for pointing this out this last fact.)Yet, stocks are still near their highs of the year. Going into the final hours of trading Tuesday, stocks were in the red but well off the lows of the day. What’s driving the disconnect between Wall Street and Main Street?Ritholtz says it’s a classic example of bad news being good news on Wall Street. “We’re in a cycle that’s not based on profitability, not based on expanding economy but based on all sorts of government supports,” he says. “Bad news is going to be good news for the next couple of quarters probably.”That’s because low interest rates and liquidity provided by the Federal Reserve, coupled with government stimulus are enticing traders to buy into the market. “Cash is trash,” says Rithotlz, who remains bullish on stocks.Ritholtz is confident that eventually fundamentals will prevail and thinks the market will take a hit once the economy shows signs of improvement, meaning the “extraordinary” stimuli can be removed. But predicting the timing is anyone’s guess. “You could have this disconnect that goes on for not days, weeks or months but years and years,” he says. So, in the meantime, Ritholtz – who correctly predicted the 2008 crash and told Tech Ticker’s audience “the mother of all bear market rallies,” was upon us in March – is still long stocks and likes commodities (thanks to a weak dollar) and emerging markets.

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Effects of Rate Cut

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Investors Hunt for Effects of Rate Cut

NEW YORK (AP) — A big rate cut by the Federal Reserve and the stock market’s huge rally in response to that move has many on Wall Street wondering: Now what?

The Fed’s decision Tuesday to slash its benchmark federal funds rate by a larger-than-expected half percentage point sent stocks soaring and lifted the Dow Jones industrials nearly 336 points. It also raised questions about the Fed’s next step and how markets might fare in the coming months.

“I think it’s probably going to help stabilize things. It seems to me that the Fed had enough room on the inflation front to really get out ahead on this,” said Bruce McCain, head of strategy for Key Private Bank’s investment management unit.

Before the Fed’s decision and even with recent moves to cut the rate it charges to loan directly to banks — known as the discount rate — Fed Chairman Ben Bernanke left some investors asking whether the central bank would cut rates at all in the face of concerns about inflation.

With that question answered, investors rushed in and put stocks a good deal above their recent lows in August. The Dow’s jump — its biggest one-day point gain in almost five years — left the blue chip index only about 1.9 percent below its record close of 14,000.41 reached in mid-July.

Still, some on Wall Street will likely question whether the Fed’s rate cut signals a deeper unease at the bank about the effect of tightness in the credit markets and widespread weakness in the housing sector. Continue reading