Either way, the rate cut makes the companies' stocks more attractive, driving prices up. Consumers who find it cheaper to borrow may spend more. That improves corporate sales, leading to bigger profits that can justify higher stock prices. Investors thus see rate cuts as a way of staving off recession and keeping the economic expansion going, and yesterday they bid stock prices up in anticipation. Lower rates help stocks another way as well - by making bonds less attractive.
Bonds are stocks' chief competitor for investor dollars.
When a bond pays 5 percent instead of 6 percent, it can't compete as well. If money flows from bonds to stocks, demand for stocks goes up and prices rise. It's quite possible, of course, for this to happen to individual stocks - it happens all the time. A company's prospects can soar if the government approves a new drug or if a ruinous lawsuit is thrown out. For some reason, investors are flipping their wigs.