The Dow Jones was steady mid-week, rising just 10 points. As pandemic hot spots continue to flare up, the potential for another downturn is real. Regardless of the Federal Reserve’s official line, speculation about negative interest rates is growing.
All three major U.S. indices tread water mid-week. The Dow Jones hovered between gains and losses before flat-lining in the late afternoon.
There is plenty of evidence that several large states, who took a lax approach during the early stages of the pandemic, have a big problem. Unfortunately, this is not just due to increased testing, as the rate of positivity and hospitalizations are also climbing.
Whether this results in more lockdowns could be irrelevant to the economy. If consumers stop spending, it doesn’t matter if restaurants and stores are open. Economic uncertainty can be as damaging as any structural problems.
The Federal Reserve has fully committed to keeping the stock market afloat. There is one highly controversial play left in the tool-box: negative interest rates. Negative rates have been used in Japan and Europe, though no positive effect has been gleaned.
How realistic is it that the Fed will take the negative-rate plunge? If you listen to Jerome Powell, not very. The Fed Chair has been adamant that cutting below zero is not on the table.
Despite this, futures markets briefly priced in negative rates by 2021. Although this is no longer the case, one prominent Wall Street name is still bracing for another cut.
Bloomberg now suggests clients should switch to a new version of its terminal that calculates negative interest rates more correctly. Yes, it could be a ploy to get more business, or perhaps the trading desk monopoly sees the writing on the wall.
While no-one knows what the effect on the Dow would be, the debate continues to rage. Fed economists don’t believe there is an issue with going below zero. Deflation is the biggest problem in their eyes.
Robert Carnell, Regional Head of Research, Asia-Pacific at ING, is not so confident. Paying close attention to many real-world complications of low rates, Carnell outlines the severe ramifications this could have on consumption:
As rates fall, there may be substitution of present consumption for future consumption, but if they fall far enough, falling expectations of future consumption may deter even present consumption. If this sounds familiar, then you may be in your 50s or 60s looking at how miserably performing your retirement savings pot is, and wondering how dismal an existence in retirement you will have on the predicted returns.
Perhaps most significantly, negative rates could signal the end of U.S. economic exceptionalism. The “King Dollar,” one of the fundamentals keeping conventional inflation metrics anchored, could be at risk.
It was another landmark day for one member of the Dow 30. Apple (NASDAQ:APPL) stock hit another record high near $355.
With its strong balance sheet and continued buybacks, Apple remains the main driver of the stock market. It didn’t hurt that several analysts raised their price targets.
Boeing (NYSE:BA) stock struggled after Beijing canceled thousands of flights amid another virus outbreak in the city.
Microsoft (NASDAQ:MSFT) rallied 1%, while Exxon Mobil (NYSE:XOM) was the worst-performing Dow stock, falling 2%.