At 10 AM yesterday morning, the Fed cut rates.
The actual statement is worth reading.
March 03, 2020
For release at 10:00 a.m. EST
The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. 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 by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.
I highlighted in green the 10 AM spike up in the S&P 500 stock index. Then, after the initial reaction, the stock market trended down to close -2.8%.
Normally, an interest rate cut is positive for stocks. But, this time it was considered an “emergency” rate cut (the media term for it today) “In light of these risks and in support of achieving its maximum employment and price stability goals.”
The headlines were negative.
Every new bear markets need a catalyst to get the blame. If this decline were to unfold into a material bear market, down -20% or more, it would be because of its valuation level of this aged bull market in stocks. As stated before, this economic expansion and the bear market is the longest ever in history in terms of time. At elevated valuation levels, we can expect higher volaltity expansion and deeper price swings. Although, these swings can also produce potential tactical trading proprieties.
According to the CME Fed Funds Futures Probability Tree, the futures market seems to expect rates are going much lower, like zero.
FOMC meetings probabilities are determined from the corresponding CME Group Fed Fund futures contracts. Probabilities of possible Fed Funds target rates are based on Fed Fund futures contract prices assuming that the rate hike is 0.25% (25 basis points) and assumes the Fed Funds Effective Rate (FFER) will react by a like amount. The probability of a rate hike is calculated by adding the probabilities of all target rate levels above the current target rate.
The Effective Fed Funds Rate long term historical trends are in the next chart.
The US 10 Year Treasury Rate has fallen to its lowest level, ever, so it’s not in uncharted territory. With the 10 Year Treasury Rate at about 1%, it was 2.72% a year ago, and the long term average is 4.5%.
The 10-year treasury is the benchmark used to determine mortgage rates and the most liquid and most traded bond in the world. Financial analyst use the 10-year yield as their “risk-free” rate when valuing a stock, bond, or markets.
Low-interest rates are great for borrowers, but not savers. The continuation of the downtrend in interest rates will continue to punish those who save their money in the bank rather than invest it in stocks, bonds, etc.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor in Florida, Tennessee, and Texas. Shell Capital is focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. I observe the charts and graphs to visually see what is going on with price trends and volatility, it is not intended to be used in making any determination as to when to buy or sell any security, or which security to buy or sell. Instead, these are observations of the data as a visual representation of what is going on with the trend and its volatility for situational awareness. I do not necessarily make any buy or sell decisions based on it. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.