FALLING INTEREST RATES AND THE STOCK MARKET

The Federal Reserve cut its funds rate by 50 basis points (bps) this week, on top of last week's unannounced 75 bps reduction. A good article on The Economist last week pointed out that on the 15 occasions since 1970 when the US Federal Reserve has cut interest rates by 75 bps or more, European stock markets have risen by an average of 10.3% over the next 6 months.

The same article has a great graph displaying the performance of some major world indices since January of 2007 (see below). Note that Japan's main index, the Nikkei 225 average, is down about 25%. This explains why my EAFE fund is down a devastating 15% at the moment (about 1/4 of EAFE is allocated to Japanese stocks).