As was telegraphed to the market last Friday and over the weekend, the Federal Reserve cut the federal funds rate by half a percentage point today. In a press conference, Fed Chairman Jerome Powell said, “We saw the risk to the outlook of the economy and chose to act.”
That action was fully anticipated by the stock market, which saw its largest one-day rise in history on Monday, with the major indices gaining between 4.5% and 5.0%.
With today’s rate cut, it appeared to us the Fed wanted the market to build on Monday’s momentum. Instead, equities traded sharply lower on Tuesday.
Our concern has been that the market would become immune to Fed rate actions. As I wrote in my 2020 Outlook, “We may have gotten all we can from lower rates. In fact, it’s possible the additional liquidity and lower rates acted like an antibiotic to curing the economy and hence the stock market. So, is it possible that now the economy has built up an immunity to lower rates? We will see, I guess.”
Today, we find ourselves in interesting times. Even as the Fed cuts rates, it would still not encourage certain activities to boost the economy. For example, if travelers are concerned about a plane being infected with the coronavirus, they’re probably not getting onboard—regardless of how low rates are.
That being said, the best and brightest are working on addressing the coronavirus. As I recently wrote, it’s not a case of uncertainty; but visibility. We know the problem and await the solution.
I do not expect the coronavirus impact to be permanent. Fears about the fallout seem too high given the Astor Economic Index® (AEI) shows the economy is currently growing at an average pace by our analysis. In my view, it is likely a short-term bottom in terms of the market’s reaction is probably not too far away.
If the AEI were to show economic growth slipped to a below average reading because of the coronavirus, we would likely change our tune and adjust our portfolios accordingly. This scenario is a different message than what we would say if the economy were growing at an above-average pace; in that case; we would tell everyone to sit tight.
Nonetheless, events such as the coronavirus outbreak have not traditionally caused recessions—only temporary speed bumps. Economic activity gets delayed to the future; if that’s the case, then activity will pick up later on.
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