Everything you need to know about the stock market amid coronavirus fears - New York Post

Last week, Wall Street had its worst crash since the financial crisis started in 2007. But on Monday, stock prices had a record-breaking increase on hopes that central banks around the world would come to the rescue.

Here are the answers to some of the questions you didn’t ask.

What’s the most worrisome part about last week’s stock market selloff, which cost investors more than $4 trillion in assets?

The biggest worry is that investors aren’t used to stock prices going down. And that’s the fault of the Federal Reserve, which for the past decade has forced people to put their money into stocks by keeping interest rates unattractively low.

So, the Fed created a bubble.

And bubbles are wonderful until they pop. And then the people who get hurt the most are usually small investors who couldn’t get their money out of the market in time.

Should people have seen this coming?

A small number of people saw it coming, those who weren’t caught up by the fast money that was being made in the market.

Normal stock markets just don’t behave like this one was behaving. It was overpriced by any measure. And it was clear that the market was ignoring many, many warning signs like trade wars, political chaos in the US, bad economies in other parts of the world and international tensions.

And too much debt. The world is drowning in debt — nations like the US aren’t behaving with any fiscal responsibility. And neither are consumers.

But it was something nobody expected that caused last week’s crash — the coronavirus scare?

It’s always something unexpected that causes the panic. In 2007, it was the fact that millions of people couldn’t pay their mortgages and had created a financial crisis at banks.

But once the unexpected thing starts to cause the market to slide, everything else that’s worrisome also gets dredged up.

The bigger problem these days is that certain forces in the market — computer traders, for instance — can keep stock prices unreasonably high simply by buying equities. There doesn’t have to be any logic behind the purchases.

And when there is no logic, stock prices will eventually come back down to Earth.

Take last Friday, for instance. The Dow Jones industrial average rallied about 600 points in the last hour of trading. Why? Because it was the end of the month and professional money managers were trying to save face with their customers. So they pushed stocks higher.

Did Fed Chairman Jerome Powell help the market last Friday by indicating that he was willing to cut interest rates?

Yes, Powell helped. But he helped for only a few minutes. Then, going into the final hour of trading, stocks sank again. And it was only because of the professional traders needing the market to go up that Friday’s losses were trimmed to merely miserable from disastrous.

The problem with the market today is simple. Nobody knows how much the virus is going to spread and how much it will hurt the world economy.

If American companies can’t get products and supplies from other countries and if they can’t sell their goods worldwide because of restrictions imposed because of the virus, then earnings will suffer.

And the Fed and other central banks around the world can cut interest rates as much as they want and it isn’t going to help. Rate cuts aren’t going to get rid of the virus and the problems it is causing.

If the Fed announced that it was going to give money away for free to researchers looking for a virus cure, then that might be something worthwhile.

Federal Reserve Chair Jerome PowellAP

Do you think the Fed will cut interest rates?

Absolutely. In fact, there could be rate cuts before this column even makes it into print.

And when rate cuts happen between Fed policy meetings — like a cut now would be — it’s both thrilling and worrisome in the financial markets.

Thrilling because the Fed and other central banks are on the job. Worrisome because they wouldn’t be making the cuts unless they thought something was seriously wrong.

But here’s the problem. Because of what the stock market just did, everyone expects the Fed to cut rates and to do it aggressively. And when everyone expects something, it has less impact on the stock market.

Aside from trying to help the stock market, is there any justification for interest rate cuts?

Not really. The economy seems to be doing fine. Through all of this the Atlanta Federal Reserve’s GDPNow forecast has the US economy growing at a 2.7 percent annual rate in the first quarter.

That’ll probably come down. And some Wall Street firms are predicting that growth will be decimated by the virus and that companies will report no earnings gains for the year.

So, here’s the problem: if the Fed cuts rates now, it will be able to cut them less later in the year when cheaper borrowing costs may actually help companies expand their business.

It’s like in basketball. When you use up all your timeouts early in the game, you won’t have them later when you really need them.

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Everything you need to know about the stock market amid coronavirus fears - New York Post
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