Yesterday evening, the Federal Reserve made its second emergency announcement this month. Rather than meet tomorrow and Wednesday, as planned, the Fed made a surprise decision over the weekend, and announced:
- A cut to interest rates by a full percentage point, down to 0% to 0.25%.
- A resumption of quantitative easing, with the bank beginning to buy at least $700 billion of assets.
- And a reduction of reserve requirements to 0%.
If the emergency 0.5% rate cut from two weeks ago was the Fed firing the howitzer, this was nothing short of a nuke.
But just as it did two weeks ago when the Fed first cut rates, and on Friday when the New York Fed announced a $1 trillion injection into the bank repo market, the markets didn’t react the way the Fed wanted.
Instead, markets crashed. Trading in stock index futures was halted Sunday just minutes after the open because they had fallen down to the limit of -5%. Premarket stock trading saw indexes down more -11%. When the regular trading session opened this morning, they too immediately hit the 7% circuit breaker and were paused for 15 minutes.
The Reality Gap right now is between what the Fed is doing, and what the market and the nation needs to get out of this crisis. By turning all its levers to the max, the Fed is using every financial trick in its books to try to turn the ship around.
But the crisis we face as a nation and a planet isn’t primarily a financial problem. This isn’t 2001, when overleveraged bets on Internet companies that weren’t making any money blew up. This isn’t 2008, when the housing market collapsed and took the financial world with it.
Here in 2020, the problem isn’t financial or economical. The financial/economic struggles are the EFFECT this time, with health and human issues being the CAUSE of the financial issues. What we need is a science/medical/social solution to the pandemic. We need to see the virus come under control, we need to see the curve of cases flattened so it won’t overwhelm our hospitals. We need a treatment for Covid-19 that will slow down transmission or symptoms and eventually, a vaccine.
Everything else is secondary. Once this primary CAUSE of the problem is being slowed, the Fed’s actions will help restarting our economy and give a boost to the stock market.
And it’s when that medical problem is solved that we will find the market bottom. The solution could come one of three ways:
- Science solution – find a pharmaceutical solution that kills the virus, limits it transmission, or hastens recovery.
- Medical solution – discover breakthrough treatment techniques that vastly reduce transmission or that speed recovery.
- Social Solution – Effective implementation of solutions that limit the spread of the virus.
Until the CAUSE is addressed, traders will have more urgent things on their minds – and markets are likely to keep falling.
While the coronavirus crisis persists, concentrate on the few work-from-home names that actually work. On Saturday I gave you ZM, COST, and TDOC as stocks that should outperform the markets. COST and TDOC are down less than half as much as the markets as I’m writing this and ZM is up a whopping +11%!
Great trading and God bless you,
D.R. Barton, Jr.