Here we go again – another near-miss Fed Red Day on Wednesday.
If you are new to Critical Signals Report, we describe Fed Red Days here.
In short, Fed Red Days occur on days that the Fed lowers interest rates (that’s supposed to be good news in a Fed-manipulated Twilight Zone), but markets nevertheless close lower (that’s bad news).
Good news is supposed to take the markets up… not down. Down is red – it means your stock investments probably lost money on a day that the Fed lowered rates – hence “Fed Red Day.”
This is equally “bad news” because it’s signaling that the Fed’s magical powers are losing their “magic,” and given the sad fact that today the Fed is the market, such red days are particularly disturbing signs.
Today, the Fed lowered interest rates by the expected 25 basis points (0.25%), taking interest rates down by a total of 0.75% since the first rate cut back on July 31 of this year. That’s a 30% rate cut since July, but just 0.75% in basis points, raising the question as to whether cutting rates that are this low really matters anymore.
Here’s what happened…
Third Uninspiring Rate Cut
The markets were up and down after the announcement, closing (as on the day of the last rate cut) at uninspiring levels. The Dow Jones Index closed up 0.43%; the S&P 500 Index up 0.28%; and the NASDAQ up 0.33%.
If cutting rates this quickly, this fast, three times in a row now is doing nothing more than supporting stocks (not taking them higher), that says yards about we are… and where we are not. When Fed rate stimulus stops working, the Fed is truly running out of bullets.
So here we are, this is the third time the Fed has lowered interest rates and the market has said, “Boo! Not enough… give me more” – more steroids, more stimulus, more rate cuts, more U.S Treasury buybacks… in short, more candy to keep this sugar-high afloat.
A third uninspiring Fed rate cut heightens the probability that we are in a turning point in this Fed-engineered Twilight Zone and that a recession is imminent or may already have begun – long before the authorities that inform on these matters has a clue.
Fed Red Day #1: On July 31, 2019, Powell’s Fed lowered rates by 25bps. That’s supposed to be good news. Markets should have gone up… except they didn’t. By the end of that day, the S&P 500 Index fell 1.09%, the Dow Jones Index fell 1.23%, and the Nasdaq Composite Index fell 1.18%.
Close Call – Fed Red Day #2: On September 18, 2019, the Fed lowered rates again, by another 25bps, to a range of 1.75%-2.00%. Stocks markets opened down and fell further on the 2:00 p.m. news to a loss that briefly reached the largest in four weeks, before recovering with the S&P 500 Index ending the session up just 3bps. The Nasdaq closed down 11bps. It was a raucous day in the markets, worthy of your attention.
Fed Red Day #3: On October 30, 2019, the Fed lowered rates again, by another 25 basis points, to a target range of 1.5% to 1.75%, while hinting future rate cuts may now be on hold. We’re not willing to wager on that. As long as growth continues to slow and inflation remains below target, we can expect more of the same come December 11 – the next Fed meeting, just four days before another round of tariffs on China are due to take effect.
Fed rate-cut days like this have forewarned of the past three recessions, namely (1) before the Oil Price Shock Recession in the early 1990s was announced, (2) before the Dot.Com Bubble Recession in the early 2000s was announced, and (3) before the Great Recession of 2008-2009 was announced.
This News is Actionable
Those of you that play or enjoy ice hockey or soccer will recall that a “hat trick” is a remarkable feat, accomplished by a single player scoring three goals in one game. I’ve watched my son pull these off more than once – a true ringer.
Fed Chair Jerome Powell, who is far less of a ringer in my eyes, has pulled off a different kind of hat trick in market terms.
He has lowered rates three times in one market cycle, aiming to woo fans to come to more games, to buy more stocks – to keep the game alive.
It isn’t working. There are no new highs in stocks since these rate cuts started.
Take heed. Be safe. Keep that cash allocation on the sidelines. Markets will need (and likely receive) more magic “juice” in the near-term; but in the longer-term, the risks demand a critical level of prudence.
6 responses to “FED RED DAY – Fed Rate Drop Fails to Inspire”
November 01 2019