- Both the S&P 500 and Dow Jones are attempting to rebound after a brutal selloff last week.
- The Fed is very likely to aggressively cut rates to support the stock markets.
- The rate cuts may inspire an immediate bounce but the long-term impact of the virus on the economy may eventually cripple the stock market.
The coronavirus (COVID-19) is showing no signs of slowing down. The stock market has been reacting like the virus is a legitimate black swan event. Last week, coronavirus fears ignited a vicious selloff that wiped out over $5 trillion in global market capitalization.
The fresh week, however, appears to be offering investors some relief. Both the Dow Jones Industrial Average and the S&P 500 are attempting to rebound from last week’s brutal selloff. The good news is that the Federal Reserve may be coming out with guns blazing to support the stock market.
The Stock Market Is Now Pricing In a Federal Reserve Rate Cut
Federal Reserve Jerome Powell hinted at the possibility of a rate reduction at the upcoming Mar. 17-18 policy meeting. The stock market is already reacting as if a drastic rate cut is guaranteed.
The CME FedWatch Tool is giving off a 100% reading in terms of rate cut probabilities come Mar. 18. The markets are not reflecting a 0.25% cut but a 0.50% reduction. It should be noted that historically, the Federal Reserve has always succumbed to the will of the market when the probability is higher than 80%.
A big rate cut would serve as rocket fuel for a market that’s desperately looking for signs of hope. I talked to economist Alex Kruger and he said that an aggressive rate cut would be a welcome development. He told CCN.com,
The Fed could cut rates aggressively in an emergency meeting. This would be huge.
The economist believes that a bounce may be on the horizon as,
charts points towards continuation higher.
Kruger also said,
But bad data surprising to the downside is only now about to start coming in, and could see many new [coronavirus] cases in the following days outside of China, particularly in the US.
In the end, it appears that a big rate cut would boost the market in the short-term. Nevertheless, the long-term impact of the virus on the economy cannot be discounted.
China’s Reduced Pollution Is Good For Earth, Bad For Economy
Coronavirus continues to rampage in China as the total number of cases skyrockets above 80,000.
The impact of the virus is so dramatic in China that levels of pollution in the country significantly plummeted.
The dramatic drop in the levels of pollution suggests that factories and transport have come to a grinding halt. The Street reported that weekend data from China indicates businesses remained closed in the world’s second-largest economy. Workers were encouraged to stay home to curb the spread of the coronavirus.
This is good news for the environment but bad news for the U.S. economy.
A Rate Cut Will Not Encourage Everyone to Get Back to Work
David Kostin, a Goldman Sachs strategist, issued a warning explaining the possibility of an economic slowdown due to the coronavirus. The analyst wrote,
A more severe pandemic could lead to a more prolonged disruption and a US recession.
Kostin issued the statement after slashing S&P 500 earnings estimate by $9. That’s due to a dramatic decline in Chinese economic output in the first quarter due to coronavirus, lower demand for U.S. exports, crippling of the supply chain for U.S. businesses, and increased business uncertainty.
Mohamed El-Erian, Allianz chief advisor, captures the likely long-term impact of a big rate cut. He says that a rate reduction can offer relief but it will not stimulate economic activity. El-Erian noted,
All that that’s going to do is help balance sheets and give some minor relief to markets. But it’s not going to encourage people to travel. It’s not going to encourage people in China to go back to work.
It appears that Monday’s stock market rebound has something to do with the increased possibility of the Fed cutting rates. If that reading is accurate, then it wouldn’t be surprising if the rally is short-lived.
The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered trading advice from CCN.com.
This article was edited by Sam Bourgi.