Why Fed’s Desperate ‘Zero’ Rate Cut Signals a U.S. Stock Market Disaster
- The Federal Reserve slashed its benchmark interest rate to zero.
- The U.S. will likely face worse coronavirus-related news in the coming weeks.
- The S&P 500 Futures are not yet responding to the Fed’s latest moves as expected.
The longest bull market in history has officially ended. The S&P 500 closed at 2,711 on Friday. The bellwether index has crossed bear territory as it is down by over 20% from its all-time high.
In a desperate attempt to resuscitate the market, the Federal Reserve announced that it has cut rates to zero. It is the final bullet in the Fed’s arsenal. Unfortunately, the U.S. is just beginning to feel the wrath of SARS-CoV-2 (coronavirus). This is why zero interest rates will likely lead to a stock market collapse.
The number of coronavirus cases in the U.S. is surging. As of this writing, there are 3,777 total cases and 834 new cases. The virus is on a rampage and the government is doing very little to stop it.
While other countries have imposed lockdowns and strict social distancing measures, Americans continue to go out and socialize in bars and restaurants. The majority of U.S. states have yet to implement measures to curb the spread of the virus.
New York hospitals are struggling to deal with the influx of patients, yet no mandatory quarantine measures have been announced. There’s also no push to implement a state-wide quarantine.
Therefore, it is very likely that we’ll see significantly worse pandemic-related news in the coming weeks. When that happens, the Fed will have nothing left in its repertoire to prop up the stock market and S&P 500.
Markets Flashing Signs of a Total Meltdown
The S&P 500 Futures nosedived by 5% and hit the limit band to prevent further tumbles. The plunge came after the Fed’s announcement that it slashed interest rates to zero. This is a strong indication that the final bullet of the central bank would not cushion the impact of the coronavirus to the economy.
Goldman Sachs equity strategist David Kostin believes that the S&P 500 could plummet to 2,000. That figure represents a 26% crash from Friday’s close. Kostin says that the coronavirus will negatively impact the economy to an unknown extent. In a note to clients, Kostin wrote,
The coronavirus has created unprecedented financial and societal disruption. The combination of thin liquidity, high uncertainty, and positioning could cause the S&P 500 to fall below our 2,450 base case estimate of fair value and closer to a trough of 2,000.
Even Fed chairman Powell admits that the coronavirus can harm profits and damage the economy. He said that the second quarter will be weak and “after that it’s very hard to say how big the effects will be.”
The above should not be considered trading advice from CCN.com. The writer does not own any shares of the companies in the S&P 500.
This article was edited by Samburaj Das.