Fed Cuts Rates; GDP Shrinks

Well, Wednesday's news came as no surprise—the Fed cut its key interest rate by 0.5%. The move brought the Federal Funds rate to 1%.

In its statement, the central bank indicated that rates could possibly go lower, especially if the "downside risks to growth"—such as the slowdown in consumer spending, business investment, financial markets and exports—persist and the U.S. economy continues to lose steam.

Speaking of losing steam, just a day after the Fed's big meeting the Commerce Department reported that U.S. gross domestic product shrank at a 0.3% rate in the third quarter. What this means is that the economy put the gears in reverse as cash-strapped consumers ratcheted back their spending at a 3.1% rate—the biggest amount in 28 years.

Yikes! That spending drop is big news, especially when we consider that consumers account for 70% of the U.S. economy and the holiday season is right around the corner. The latest GDP reading is just an estimate, but is still the clearest indicator to date that our economy is weak. If we see a drop in GDP in the next quarter, we will meet the official definition of a recession.

The figure is unsettling, for sure, but please don't think it was unexpected. In fact, economists thought GDP would contract at a 0.5% rate in the third quarter, so the GDP estimate was better than expected. That is not to say we're out of the woods just yet. The economy still has to absorb the more than 700,000 jobs lost so far this year, and the toll the housing and credit crises have taken on financial markets. But there is a silver lining.

I know that it's been an incredibly stressful month for investors. But we have to focus on the bright side: namely, the fact that intraday lows set on October 10 by the Dow and S&P 500 have been relentlessly "retested" but never broken through. The stock market is undoubtedly bouncing along the bottom.

Now is not the time to be sitting on the sidelines, hoarding cash. Fundamentally superior stocks—the stocks with solid earnings and growth—are trading at unquestionably low valuations. The time to buy stocks is now because when the market rebound kicks into gear, the turnaround will be fast and furious. Believe me when I tell you, you won't want to miss it!

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