MARCH 3, 2020
Stocks fell in volatile trading on Tuesday after the Federal Reserve slashed interest rates by half a percentage point in an emergency effort to stem slower economic growth from the coronavirus outbreak.
The decision came two weeks before the Fed’s scheduled meeting as the central bank felt it was necessary to act quickly to combat the effect of the virus spreading worldwide. It’s the first such emergency action coming in between scheduled meetings since the financial crisis.
“It’s great that the Federal Reserve recognizes that there’s going to be weakness, but it makes me feel, wow, the weakness must be much more than I thought,” CNBC’s Jim Cramer said on “Squawk on the Street” right after the sudden cut. “I’m now nervous. I’m more nervous than I was before.”
The Dow Jones Industrial Average traded 500 points lower, or 1.9%, after rising more than 300 points earlier in the day. The 30-stock average gyrated between sharp gains and solid losses after the decision was announced. The S&P 500 and Nasdaq Composite were both down at least 1.5%.
“The coronavirus poses evolving risks to economic activity,” the Fed said in a statement. “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”
Traders had already priced in a rate cut of 50 basis points by this month’s policy meeting. Fed Chairman Jerome Powell noted the central bank was not prepared to use any additional tools to stimulate the economy aside from rate cuts. This may have disappointed some on Wall Street who were expecting something more from the central bank.
Bank shares fell broadly as the benchmark 10-year Treasury yield hit a record low. Bank of America dropped more than 4% while JPMorgan Chase and Citigroup slid 3.5% and 2.7%. The 10-year rate hit a low of 1.026%.
“Financial conditions only ease if market participants are confident enough to take risk,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “This type of panicky move, when the Fed has only 4 more rates to cut, I believe does the exact opposite.”
“Because of the huge economic unknowns right now still, investors will remain risk averse thus diluting the impact of this move,” said Boockvar.
Tuesday’s announcement comes after the G-7 said in a statement earlier on Tuesday they will use policy tools to curb an economic slowdown. However, the statement contained no specific actions.
Investors have been fretting over a potential economic slowdown as the coronavirus spreads around the world. More than 89,000 coronavirus cases have been confirmed globally along with more than 3,000 deaths related to the virus.
“The worse the economic situation gets, the more likely there will be massive coordinated monetary and fiscal stimulus to offset the weakness,” Tony Dwyer, chief U.S. equity strategist at Canaccord Genuity, said in a note. “There is no way to judge the global economic and EPS impact of the COVID-19 virus as cases globally are still ramping.”
Tuesday’s moves follow a roaring comeback rally in the previous session that saw the Dow post its biggest percentage gain since March 2009. The index also recorded its largest-ever point surge on Monday.
Monday saw U.S. stocks snap a losing streak that had gone on for over a week. Some investors were skeptical that the rally has legs without a significant central bank response. Even if that comes to fruition, investors have their doubts the market has seen the end of its tumultuous trading of the last six days.
Jeff Mills, the chief investment officer at Bryn Mawr Trust, said Monday on “Power Lunch” that he was not advising clients to buy back into the market and that Monday’s rally was just a “technical snapback.”
“I think the spectrum of outcomes is so wide here that one trading day is not going to resolve all of our issues, so we’re telling our clients just to sit tight for now,” Mills said.