In an unexpected move not occurring since 2008, the Fed cut rates 50-basis points this morning in between FOMC meetings. What does it mean? Our analysts weigh in
Well, that didn’t take long …
In yesterday’s Digest, we noted how a rate cut was coming — we couldn’t be sure when, or by how much, but something was headed our way.
It turns out, that “something” was a 50-basis point cut that happened this morning.
The size and timing of the cut surprised many, but the stated reason surprised no one: the coronavirus.
In a statement this morning, the Fed noted, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
In a news conference this morning, Fed Chairman Powell said the Fed “saw a risk to the economy and chose to act.”
From Powell:
The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one. Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.
Here’s how it played out this morning … Before the Fed’s rate-cut, the Dow was down 200 points after a statement from G7 finance ministers failed to promise concrete fiscal or monetary policies directly aimed at combatting the coronavirus.
So, the markets were disappointed. But then Powell, the white knight, shows up and saves the day with a 50-basis point cut — between Federal Reserve meetings, mind you.
The kneejerk reaction is optimism; the Dow reverses and surges 500 points north … only to bounce around while investors digest the news. Then the fear kicks in — why cut so much? And why now? Sellers then stepped in, reversing the markets again, sending the Dow down 600 points.
As I write early afternoon, markets are falling back toward their lows of the day with the Dow down nearly 700 points.
So, why didn’t the Fed’s decision lead to a sustained market rally?
Well, first, who knows — given the reversals on the day, the market might be surging by the time you read this. But I suspect that many investors are likely wondering what I’m wondering …
***What will this rate-cut do to actually address coronavirus fears?
After all, a cut isn’t a vaccine for the virus … nor will it magically return workers to Chinese factories where they can make up for the shortages that are impacting the supply-chain economics of U.S. companies … nor will it prevent the spread of coronavirus here in the U.S … nor will it prevent scared U.S. workers from choosing to work from home, which might further impact productivity and earnings …
On the other hand, could this cut be effective in short-circuiting a negative reaction to the spread of the coronavirus, therein preventing even worse economic fallout?
Let’s turn to our experts to get their take.
***”We recommend investors give the market a day to shake itself out”
Let’s start with John Jagerson, editor of our popular trading service, Strategic Trader.
From John:
The last time the Fed cut the overnight rate in between meetings was October 2008 and the market was in a full-blown panic. The same argument for action is being used now that the Fed has announced a half-point cut to the target rate to offset the negative economic impact of the corona virus outbreak.
We are concerned that there is a difference this time in the sense that the economy is not in a contraction already and rates are already incredibly low.
Investors pay attention to the Fed as a gauge of confidence. A rate cut could be a sign that things are worse than expected, which could lead to blowback from market bears.
I reached out to John for comment shortly after the Fed’s announcement. At that time, the market was surging on the news. That surge makes John’s next comment for patience seem even more astute …
We recommend investors give the market a day to shake itself out and digest the impact of the Fed’s move. If the rate cut is seen as a positive by the market, we like the consumer staples sector as a way to capitalize on lower interest rates (good for dividend values) and strong retail consumers.
We don’t like banks, brokers, or insurance companies following the Fed’s news as this could impact their ability to profit from the yield spread — the difference between long-term and short-term rates.
***”This should have been done a while ago”
Next, let’s turn to master income investor, Neil George.
Neil begins with a positive take on the news:
This should have been done a while ago and I would argue that the FOMC should work to further normalize the U.S. Treasury yield curve.
He then addresses a concern many are vocalizing based on today’s cuts — namely, does the cut leave the Fed with little to maneuver if economic conditions worsen?
Back to Neil:
Many are critical of the FOMC in moving its target range down as they argue that it leaves less in its quiver of actions if the economy has a bigger challenge. But those that have taken a money and banking course either in undergraduate or graduate school will know that the FOMC and the Fed have a tremendous number of other tools beyond Fed Funds target range adjustments.
Neil notes that bonds are rallying, and he expects more gains to come. But what else does he like given today’s cut?
… my preferred defensive investment sectors of real estate investment trusts (REITs) and U.S. utilities are both in the positive green on my current screens, as are some very specific individual companies that are as interest-rate-sensitive such as homebuilders.
The FOMC isn’t done and I am calling additional rounds of Fed Fund target cuts amounting to at least another 50 basis points.
Investors should be buying and owning bonds and on the stock front — continue to focus on U.S.-centric companies including the defensive REIT and utilities sectors.
***”The Fed did the right thing”
Famed investor, Louis Navellier, put out a podcast this morning, speaking to the news.
One of the first things he addressed was John Jagerson’s point from above — namely, how Wall Street is suddenly asking lots of nervous questions: “why is the Fed cutting rates in between meetings? This is the first time since 2008 — does it know something we don’t know?”
Louis brushes this off, calling Wall Street “its normal, insecure self.” He says the Fed did the right thing and simply moved faster than we thought it would.
As to what to look for from here, Louis says we want to see volatility and downward selling pressure dry up over the next couple weeks, and then that would likely mean a good buying window.
From Louis:
So, as we look back on what’s happened, there’s no ifs, ands, or buts, the market is going to go higher than ever, because we have lower interest rates than ever. I never would have imagined interest rates would be this low now. So, we just have a lot to look forward to in the upcoming months.
In particular, Louis likes quality dividend stocks. That said, he’s not recommending diving back into the markets whole-heartedly today. He said he’ll be monitoring the situation and will alert his subscribers when that “buying” moment is, but we could be in for more volatility in the short-term.
***The “bigger issue” from Matt McCall
Expert thematic investor, Matt McCall noted that the Fed could have simply waited until its March meeting to cut rates, but he then pointed toward “the bigger issue.”
From Matt:
The bigger issue is that the government and media stop the fear-mongering and allow people and businesses to go about their business as usual.
I have been saying for weeks that the numbers show the coronavirus is nothing more harmful than the ordinary flu. The media creates headlines because it increases viewership that in turn leads to more advertising dollars …
And as I am writing this, I see this BS headline on CNBC … Stoking more fear …
BREAKING US currently has 10% of face masks needed for a ‘full-blown’ coronavirus pandemic, HHS official says
My view on the stock market is that there will be a lot of volatility in the coming weeks, creating amazing long-term buying opportunities. As long-term hypergrowth investors, we will use the wild swings to establish new positions.
***”Precious metals way up … U.S. dollar way down”
Global macro expert, Eric Fry, noted that containing a financial contagion isn’t much easier than containing an epidemic. So, he doubts that Powell’s new rate cut will bring immediate, substantial relief to the stock market — but he notes it likely won’t hurt the market either.
As to the biggest winners from today’s cut, Eric is looking at one specific corner of the investment markets …
… the biggest winners from today’s rate-cut are the precious metals. They bounded higher on the news and continue to hold their gains. Aggressive rate cuts like today’s tend to undermine the dollar’s value and boost gold and silver prices.
And that’s exactly what we’re seeing today: Precious metals way up … U.S. dollar way down. I’d expect both of these trends to “get legs” over the coming weeks.
So, wrapping up, there’s lots to process from today’s news. Volatility should surprise no one if we see it push the markets around over the next few days.
That said, as our analysts have noted, we’re likely in for some great buying opportunities as things settle.
We’ll keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
