Surprise rate cut fails to soothe stocks
Even after Fed step, investors can’t shake off worries; indexes log more losses
NEW YORK — Fear and uncertainty continued to roil Wall Street on Tuesday and stocks fell sharply after an emergency interest-rate cut by the Federal Reserve failed to reassure markets wracked by worries that a fast-spreading virus will slam corporate profits and the economy.
The S&P 500 fell 86.86 points, or 2.8%, at 3,003.37. The Dow Jones Industrial Average lost 785.91 points, or 2.9%, closing at 25,917.41. It had surged 5% a day earlier on hopes for aid from the Fed and other central banks. The Nasdaq fell 268.07, or 3%, to 8,684.09.
The central bank cut the benchmark U.S. interest rate by half a percentage point, reducing it to just below 1.25%, down from about 1.75%.
While the cut gave some investors exactly what they had been asking for, Federal Reserve Chairman Jerome Powell acknowledged that the ultimate solution to the virus challenge will have to come from health experts and others, not central banks.
“We don’t think we have all the answers, but we do believe our action will provide meaningful support to the economy,” Powell said at a
news conference shortly after the rate-cut announcement.
Bond yields swung after the Fed’s announcement. The yield on the 10-year Treasury note slumped to 1.01% from 1.08% late Monday after earlier dropping below the 1% threshold for the first time.
The 10-year yield tends to fall when expectations are for weak economic growth and inflation. Shorter-term yields, which move more on Fed actions, had even more dramatic drops. The two-year Treasury yield sank to 0.71% from 0.81%.
The market’s negative reaction may reflect a recognition that cutting interest rates or engaging in other types of fiscal stimulus will do little to contain the virus or help companies deal with delayed orders or an infected workforce.
“You are not going to slay a disease by lowering interest rates,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. He compared the Fed’s cut to “placing a Band-Aid on an arm to cure a headache.”
Some traders are questioning whether more aid is on the way to stabilize the market, while others called the Fed’s move premature.
The Fed’s move is one of several that policymakers have discussed in recent weeks. Congress is preparing a $7.5 billion emergency funding package to help with the costs of fighting the epidemic. President Donald Trump on Tuesday called for new tax cuts and an even bigger Fed rate cut to stimulate the economy. Treasury Secretary Steven Mnuchin, meanwhile, said officials would consider an infrastructure package and regulatory relief for banks, but discussions appeared to be in early stages.
Through it all, markets are still faced with the same quandary that has sent stock prices tumbling 11% since they set a record just two weeks ago: No one knows how far the virus will ultimately spread before authorities can get it under control, and by how much companies’ profits will be shorn because of it.
Stocks rallied briefly in the morning after the Fed’s surprise move, but it took just 15 minutes for the gains to evaporate. Treasury yields fell to more record lows as investors ratcheted back expectations for the economy and inflation. A gauge measuring traders’ fear of upcoming swings for stocks jerked wildly up and down through the day.
The S&P 500 swung between modest gains and losses for about an hour after the Fed’s announcement before turning decisively lower. It marks the eighth drop in the past nine days for the index.
The Fed has a long history of going to the market’s rescue with lower rates and other stimulus, which has helped this bull market in U.S. stocks become the longest on record. Some analysts said the Fed’s latest cut could provide some more confidence.
“Confidence in markets is crucial,” said Quincy Krosby, chief market strategist at Prudential Financial.
The Dow had jumped Monday to its best day in more than a decade on rising anticipation for coordinated support from the Fed and other central banks. Even before Tuesday’s announcement, traders were convinced that the Fed would cut rates by half a percentage point on March 18 at its next meeting.
But doubts are high about whether the medicine provided by central banks can be as effective this time around. Lower rates can encourage shoppers and businesses to borrow and spend more, but they can’t reopen factories that have been shut or recall workers who are out because of quarantines.
The high stakes pushed the Fed to cut rates outside of a regularly scheduled meeting for the first time since the 2008 financial crisis, when investors were considering a complete meltdown of the world’s financial system as possible if not likely. That in itself may have spooked the market, as some investors wondered if the Fed saw things as worse than they were led to believe.
“I don’t believe that market participants woke up this morning thinking we were facing a crisis similar to the global financial crisis,” said Kristina Hooper, chief global market strategist at Invesco. “But that’s what the Fed’s actions suggested to some.”
Markets are likely to remain shaky until investors get a sense of what the worstcase scenario really is in this virus outbreak. As the virus spreads beyond China, companies across continents and industries say they expect it to hit their profits.
Payments processor Visa is one of the latest companies to join the lengthening list warning investors. It said its quarterly revenue will be weaker than earlier predicted because of a drop-off in travel-related spending on cards.
“To get a floor on the markets, realistically, what we need to see is not so much a cut in the number of new coronavirus cases, but at least a slowdown in the acceleration,” said Salvatore Bruno, chief investment officer for IndexIQ.
The topsy-turvy trading Tuesday got off to a slow start in the United States. Earlier in the day, the Group of Seven major industrialized countries pledged support for the global economy, but they stopped short of announcing any specific new measures. Disappointment in the lack of action helped push U.S. stocks lower at the opening of trading, before the Fed surprised markets with its announcement of the half-point rate cut at 9 a.m.
Before the Fed made its move, the Reserve Bank of Australia cut its key interest rate to a record low 0.5%
European stock markets were broadly higher. In Asia, Japan’s Nikkei 225 fell 1.2% but other markets were mostly higher.
Benchmark crude oil rose 43 cents to settle at $47.18 a barrel. Brent crude oil, the international standard, fell 4 cents to close at $51.86 a barrel. Wholesale gasoline fell 1 cent to $1.53 per gallon. Heating oil was unchanged at $1.53 per gallon. Natural gas rose 4 cents to $1.80 per 1,000 cubic feet.
Gold rose $49.60 to $1,644.40 per ounce, silver rose 45 cents to $17.19 per ounce and copper fell 2 cents to $2.57 per pound.
The dollar fell to 107.24 Japanese yen from 107.87 yen on Monday. The euro strengthened to $1.1176 from $1.1163.
Some traders are questioning whether more aid is on the way to stabilize the market, while others called the Fed’s move premature.