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Fed Surprise: 50 Basis Point Cut Does Little To Support Wobbly Markets

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Fed Surprise: 50 Basis Point Cut Does Little To Support Wobbly Markets

The market’s a hungry beast and the Fed gave it something to eat, but it hasn’t been satiated yet.

Stocks resumed their downhill slide Tuesday and 10-year yields dropped below 1% for the first time ever after the Fed surprised with an emergency 50-basis point easing. Stocks initially bounced, but then headed lower, maybe because the cut was already built in, to some extent.

In other words, if yesterday was a "buy-the-rumor" rally, today's reaction could be a “sell the fact.” The question is whether things could possibly stabilize more quickly with the Fed out of the way for now. After today’s wobbly trading, that’s still up in the air. Yields seem to be telling us, “it wasn’t enough.” 

The fact that the Fed did a 50-basis point cut when there’s a high probability of another 25-basis point cut ahead won’t be enough to satisfy many in this marketplace. It feels like the Fed got pushed into a corner. It also left the impression that maybe things are worse than we think they are, even though recent economic numbers tell us that’s probably not the case.

The problem with a rate cut is that it’s a long-term bandage to a cut that’s bleeding and needs stitches now. With the virus, the “stitches” would be some sort of vaccine or medicine that slows the transmission or eases symptoms. As Fed Chairman Jerome Powell said in today’s press conference, “Ultimately, solutions to this problem will come from others.”

Rate cuts tend to take four-to-six months to work through the economy. That might mean if we find something that mitigates the virus—whether it’s warmer spring temperatures or some sort of inoculation—we could be set up for a rocking good summer.

Parsing The “Fed-Speak”

Some think Powell might have made things tougher for stocks and yields with his choice of words in the press conference. “Risks to the outlook have changed materially,” he said (emphasis ours). 

That word, “materially,” could be seen as a loaded one, with the Fed telling people things might be even more dire than expected. It raises the question, “What does the Fed know that we don’t?” They’re always so careful with words, but maybe these words mean they’re seeing something darker.

Arguably, Powell telegraphed things last Friday when he said the Fed would do what’s needed to address the virus. You could even say the market took his Friday hint seriously, the way it ran up historic gains on Monday after last week’s stomach-churning sell-off, and baked in a 100% chance of a 50-basis point cut. All the Fed did today was move up timing a bit. Economists expect other central banks, including in Europe and Canada, to soon follow the Fed’s example.

What A Rate Cut Can And Can't Address

A rate cut could maybe help consumer and business demand over coming months, especially if the virus ends up fading. But no one’s going to see the rate cut and go running out to book a cruise or vacation to China or take a trip to a theme park. Airline, hotel, and travel stocks—some of which showed a little bounce this morning—were back under pressure by afternoon.

The rate cut also can’t restore supply chains, though according to Powell it could potentially provide a meaningful boost to the economy and boost investor confidence. The Fed seems to be trying to keep the wheels of commerce turning as much as it can and give consumers a bit of confidence. It’s also probably trying to get ahead of things if the economy slows further. A rate cut can tell you that the Fed sees more turbulence ahead.

Though this easing likely won’t affect prices at the store, it can make borrowing more attractive when it comes to larger, longer-term items like cars, furniture, and homes—and on that point it's notable that the Real Estate sector ($IXRE) was the only sector to finish down less than 1% Tuesday. It also might give businesses a little more assistance if and when they decide the worst is over and want to expand. Again, that’s more of a long-term thing. 

One danger is that the Fed’s getting to the point where it has little ammunition to fight back if the economy does descend into a recession. It’s four 25-basis point cuts away from getting down near zero again for the first time since 2015. Powell has said over and over he’s not interested in negative rates, the way Europe and Japan have done things. So the floor seems pretty clear. 

Yield Pain Felt By Financials As Congress Eyed

Another danger from descending rates is to the Financial sector, which is the second largest in the S&P 500 Index (SPX). It’s hard to have a sustained rally when a sector this large is getting crippled. These rate cuts are taking away the primary way banks make money. 

With rates this low and the bond market signaling more economic pain, attention could turn toward another neighborhood in Washington, D.C.: Capitol Hill. Some sort of fiscal move, like a suspension of payroll taxes, might be eyed by Congress. People are looking at Washington as a last line of defense.

Speaking of Washington, it’s Super Tuesday in the Democratic primaries. By tonight, we’ll have results from 14 states holding nominating contests to pick someone to run this fall against President Trump. Don’t be surprised if the markets move overnight tonight and into tomorrow as the results come in.

From a technical perspective, the high in the SPX earlier today was nearly at the 50% retracement level of the move from the February high to the recent lows. A zone of between 3170–3220 could continue to represent a tough region for the SPX to plow through, because it marks the confluence on charts of a 61.8% retracement (an important technical level), the 100-day moving average, and the descending 20-day moving average (see chart below). 

In any move to the upside, the region around 3045—approximately the 200-day moving average for the SPX—is one level that would be constructive to see stocks close above. 

If there’s a silver lining today, it’s volatility. The Cboe Volatility Index (VIX) didn’t skyrocket and stayed below 40 after testing 50 last week. It was around 14 a month ago, and volatility isn’t likely to dissipate anytime soon. 

What’s Hot; What’s Not

Gold caught a bid Tuesday, climbing as much as 3% at times and back to well over $1,600 an ounce as rates took a dive. Gold-related stocks had some of the biggest gains, with Barrick Gold Corp (NYSE: GOLD) climbing almost 4% and Agnico Eagle Mines (NYSE: AEM) up more than 4%.

Also, some of the big speculative stocks like Beyond Meat Inc (NASDAQ: BYND) and Tesla Inc (NASDAQ: TSLA) had moments of strength as it looks like recent lower prices along with the drop in rates might have some people getting more interested in taking a flier. 

On the other hand, it feels like you can’t give away many of the transport stocks, as the Dow Jones Transportation Average ($DJT) fell nearly 3%. Shares of United Airlines Holdings Inc (NASDAQ: UAL) and American Airlines Group Inc (NASDAQ: AAL) each gave up 4%. 

Resort and cruise names did even worse, with Norwegian Cruise Lines Holdings LTD (NYSE: NCLH) down 6% at times and Wynn Resorts, Limited (NASDAQ: WYNN) off more than 5%. Another sector getting hurt is Financials, with JPMorgan Chase & Co (NYSE: JPM) and Goldman Sachs Group Inc (NYSE: GS) both sinking.

CHART OF THE DAY:  CAN SPX FIND A GAP IN DEFENSIVE LINE? On the daily chart of the S&P 500 Index (SPX–candlestick), the 61.8% Fibonacci retracement level (yellow horizontal line), 100-day moving average (blue line), and 20-day moving average (purple line) come together between 3170 and 3220. This could prove to be a strong resistance level for SPX to break through, when it gets there. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

Image Sourced from Pixabay

 

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