- An emergency double rate cut from the Federal Reserve failed to stop the Dow Jones from sliding on Tuesday.
- A nervous stock market is left wondering how bad things are if the Fed would take such dramatic action.
- Dow bears pounced on the belief that interest rates will do little to influence a demand shock caused by the coronavirus.
The Dow Jones crashed 1,000 points from its highs on Tuesday after the Federal Reserve’s emergency rate cut provided temporary relief for a shaky U.S. stock market.
Further weighing on the bull case for the Dow, the 10-year U.S. Treasury bond yield plunged below 1% for the first time in history.
Dow Jones Plummets as Bears Aggressively Sell the Fed Cut Bounce
All three of the major U.S. stock market indices lost ground on Tuesday.
- The Dow plunged 694.35 points or 2.6% to 26,008.97.
- The S&P 500 slid 2.38% to 3,016.76.
- The Nasdaq fell 2.58% to 8,721.38.
In the commodity sector, the big winner from the Fed’s emergency rate cut was the price of gold, which exploded 2.6% higher to $1,636 as the dollar weakened.
Crude oil sputtered to paltry gains, even after OPEC+ agreed on a supply cut to counteract weakening demand.
Dow Tumbles as Benchmark Bond Yield Hits All-Time Low
While there is tremendous uncertainty in the stock market, interest rate markets appear sure of one thing: The Federal Reserve is not finished easing. Fed funds futures are flashing 60% confidence that Jerome Powell cuts by an additional 25 basis points in April.
Reacting to these rate cut pressures, the yield on the benchmark 10-year Treasury note broke the psychologically significant 1% bound for the first time in history.
While the FOMC’s intention was clearly to calm investor fears, the emergency rate cut appears to have had the opposite effect.
While the Dow Jones initially rose higher, this optimism faded as the Fed’s concerns highlighted the negative economic impact of the coronavirus.
This weakness in the stock market festered as Powell hinted that additional stimulus was on the way from around the G7.
Stock Market Fears Demand Shock as Coronavirus Spreads
Helping to explain the Federal Reserve’s decision, economists at ING speculated that an anticipated demand shock jolted the crisis-level move from the U.S. central bank:
The concern now is that the fear factor surrounding Covid-19 will change corporate and consumer behaviour and lead to a demand shock as well.
This is most likely through the service sector of the economy with travel, hotel accommodation, restaurants and leisure-related sectors looking vulnerable.
Add in the prospect of significantly weaker export performance, and a negative second-quarter GDP print is looking a distinct possibility.
A steady spread of the coronavirus in the United States persists, and New York announced its second case of COVID-19 today. Six deaths have been recorded, with Washington State accounting for four of those fatalities.
Consumer fear seems to be very real, and Google searches for coronavirus symptoms are soaring.
Dow Stocks: Apple Rally Fades, Boeing Follows
A very rough day in the Dow 30 saw a sizable chunk of Monday’s gains erased.
Leading the decline were some of the index’s most heavily weighted stocks. Apple slid 2.9%, Boeing lost 2.2%, and Microsoft shed 3.9%.
Given the collapse in bond yields, it was unsurprising to see financial giants JPMorgan Chase (-3.5%) and Goldman Sachs (-2.5%) losing ground.
A weaker crude price continues to weigh on big oil, and both Chevron and Exxon Mobil were also trading lower – with the latter down more than 4%.
Last modified: September 23, 2020 1:37 PM