Continuing to sell-off, Wall Street again showed that profit-taking rules the day when funds exploit any national or global crisis to lock-in gains. Wall Street analysts know at some point soon, capitulation will happen, where the nation’s biggest funds buy back into the market, causing the V-shaped curve, indicative of a snap-back rally. When that happens in the present correction is anyone’s guess. With today’s midday drop, the Dow Jones Industrial Average was at 25,112, down about 663 points, with about an hour-and-twenty minutes to go in the trading session. Dow Jones was down more than 1,000 points earlier, looking like that’s where it’s heading on the close into a long weekend. Analysts need the weekend to figure out where things are headed next week, if in fact a bottom had been reached. Whatever happens with the coronavirus has little to do with Wall Street corrections.
Analysts expect the Federal Reserve Board to add more stimulus at its March 18 meeting, cutting the Federal Funds Rate from 1.75% to 1.50%, depending on how Fed governors see their metrics. Before the sell-off, 67-year-old Fed Chairman Jerome Powell expressed comfort with current interest rates, seeing the economy—inflation, jobs and GDP growth—strong enough to continue the Federal Funds rate. How that changes with Wall Street is anyone’s guess. It’s possible that by the time the Fed meets March 18, Powell will leave rates at 1.75%. “Although moderate Fed rates cuts are unlikely to be powerful, the committee will probably be reluctant to disappoint market expectations for substantial rates cuts for fear of tightening financial conditions further,” said Goldman Sachs. With or without the coronavirus, Goldman Sachs predicts 2020 U.S. Gross Domestic Product [GDP] at 2.0%.
Fed officials on the Open Market Committee that sets monetary policy [interest rates] are reluctant to let Wall Street dictate what’s good for the economy. But with the U.S. economy hovering about 2% GPP growth, Powell can’t afford to let the economy lapse into recession, something he may not stop. President Donald Trump certainly doesn’t want that to happen heading into a heated election, giving Democrats more reason to attack his management of the economy. Before Trump signed his tax cuts Dec. 22, 2017, some economists predicted recession in 2018. When that didn’t happen and GDP growth stayed at around 2%, Powell cut the Federal Funds Rate three times or 75 basis points in 2019. When the FOMC meets March 18, markets could be recovery mode, prompting Powell to keep interest rates steady. Powell has said the underlying economy, in terms of corporate profits and jobs growth, looks good.
Wall Street remains in sell-mode until there’s more guidance on the Covid-19 crisis. Upgraded to “very serious” today by the World Health Organization [WHO], Wall Street continues to sell-off, wringing out more optimism in markets. “We got the correction we have been looking for, the market has no become washed out enough to generate a meaningful reflex rally, but at some point the next month we expect the major indices to test the lows,” said New York-based Conaccord Genunity investment bank. Expecting the sell-off to go on for the next month, Conaccord gives no guidance to investors looking for a bottom. WHO chief Tedros Adhanom gave no reassurance today, telling markets that Covid-19 is now pandemic, spreading to different continents, causing investors to continue to sell. Short-sellers have taken over for now, capitalizing on the current market sell-off.
Global financial markets don’t like geopolitical uncertainty, something that now plagues Wall Street. Until WHO or Washington-based Centers of Disease Control [CDC]l tells markets that there’s some containment of the crisis, markets will sell off. Most economists don’t expect the kind of meltdown seen in 2007, when the Dow Jones went from 14,198 March 5, 2007 to 6,469 March 6, 2009, a whopping 55% drop. No economists expects that.. Judging by market behavior at the end of today’s trading session, it’s clear that fund managers are buying on dips, suggesting that the current rout could be cover soon. If investors really believed share prices would continue to slide, they’d be selling off not buying back shares. That’s good news for long-term investors who fear their $401(k) and pension funds would evaporate. Dow Jones made a dramatic recovery at the end of today’s trading.
Market corrections especially with unknowns like the coronavirus are no fun for investors watching from the sidelines. Watching the Dow Jones recover from over 1,000 points down to 356 at 25,409 indicates that value investors jumped back in at the end to today’s trading session. If there were really fears of long-term global crisis, investors wouldn’t jump back in for some short-term profits. Either way, Wall Street knows how to maximize profits regardless of what happens with the coronavirus or any other geopolitical crisis. When Canaccord talks of a “reflex rally,” they’re talking about traders buying on dips. Munich-based Allianz SE economist Mohamed El Erian warned fund managers not to buy on dips unless they get more guidance on Covid-19. If all goes well this weekend with the virus, Wall Street could start its “snap-back” rally, driving market averages to recover losses.
