In its first intra-meeting move since the financial crisis, the Fed cut the fed funds rate by 50bp to 1.00-1.25%.
While Powell said, “The fundamentals of the U.S. economy remain strong,” he added, “The spread of the coronavirus has brought new challenges and risks,” and “the risks to the U.S. outlook have changed materially.”
Powell conceded the Fed doesn’t have all the answers – monetary policy can’t address a supply shock nor can it slow the rate of infection.
A fiscal policy (My view: tax cuts/debit cards with an expiration date (if that is possible)) and health care response is needed, but he believes the Fed’s cut will—“provide a meaningful boost to the economy” by supporting business/consumer confidence and interrupting the recent tightening of financial conditions.
Maybe. But a rate cut isn’t enough to aid industries dependent on person-to-person contact.
The market’s reaction: negative. Was the intra-meeting cut a sign of desperation? Inan abbreviated Q&A session following the rate cut, Powell’s remark that he fully expects the economy to “return to solid growth and a solid labor market as well” has me wondering if he’s already seen the February jobs’ report, which is out Friday.
That said, the survey is taken during the pay period the includes the 12th day of the month. That’s in front of the Feb 19 S&P 500 peak.
What’s happening? There is an enormous amount of economic uncertainty being generated by FEAR of the virus, not the rampant spread of the virus. Flu infections far, far, far, outpace what we’ve seen so far from COVID-19.
Uncertain outcomes include:
- Will we fall into a recession that sends corporate profits lower,
- Will the economy stall before accelerating in the summer or fall, or
- Will we only see a modest/temporary slowdown that delays the projected acceleration in profits?
It’s an unanswerable question; therefore, investors shun risker assets.
Recession risk
Clearly it has risen, but action over the last couple of days in some junk bond funds is encouraging. Still, the situation in high-yield debt remains fluid.
We may see a slight bump in consumer spending as some folks stock up on staples, but it’s very difficult to model how much the economy may slow, or whether we may see a contraction in Q2 or beyond.
Hence, the flight out of riskier stocks and into the safety of Treasuries. Is a bottom in sight? Have we already hit bottom? Or we headed into a bear market? Those who know how I approach investing know that I don’t try to time the market. It’s impossible. A well-diversified investment portfolio that’s tailored specifically to your goals and risk tolerance (and other factors) is the best long-term path. Please contact your financial advisor for guidance.
What we do know is that stocks have historically had a long-term upward bias. Volatility and downturns are inevitable, and bull markets don’t last forever. And, for 200 years, bull markets have followed bear markets.
While COVID-19 does appear to be deadlier than the flu, we may look back on this much like MERS, SARS, or H1N1. None received today’s media attention, which may be stoking public fears, and little damage occurred to the U.S. economy.
Lighter note
Masks (assuming they do any good) and hand sanitizers are hard to come by, but there’s plenty of toilet paper at my local Walmart. That’s a good sign we’re not seeing a full-blown panic.
