Long-term Worry vs. Short-term Reality

Posted by: Ben Steverman on December 17, 2007

If you needed more evidence of the stock market’s obsession with the short-term, the past week has provided it. Stocks fell last week: Investors threw a fit when the Federal Reserve cut interest rates by only a quarter point. Panicked about a slowing economy and lingering financial crisis, numerous market commentators wanted a half-point cut, and they wanted it now.
But then new economic data arrived at the end of the week, and the consumer and producer price indexes showed the danger of inflation is rising rapidly. Lower interest rates only heighten that danger further.
No one knows yet if that threat of inflation is real. But a return of serious inflation to the U.S. economy would be a disaster, even if it doesn’t much concern short-term traders, far more obsessed with the next month than the next decade.
This battle between short-term and a long-term interests is a conceptual can of worms. It happens everywhere, especially in companies, where executives often see themselves choosing between what’s right for the company long-term and what will help the stock price this quarter or this year.
It’s easy to get on your high horse and say the Fed, or CEOs, should always focus on the long term. But the problem with the long term outlook is that it’s so much fuzzier than the realities right in front of your face. It’s much harder to react to a distant worry than a clear and present danger. I don’t have an answer to this quandary, which is why I don’t envy Fed Chairman Ben Bernanke’s balancing act.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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