Surprise cut from Fed fails to stem the stock market’s dread over coronavirus

Markets are still faced with the same quandary that has sent stock prices tumbling 11%: No one knows how far the virus will ultimately spread.

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Federal Reserve Chairman Jerome Powell

Federal Reserve Chairman Jerome Powell

AP

NEW YORK — Fear and uncertainty continue to control Wall Street, and stocks fell sharply Tuesday after an emergency interest-rate cut by the Federal Reserve failed to reassure markets wracked by worries that a fast-spreading virus will cause a recession.

The Dow Jones Industrial average sank 785 points, or 2.9%. It had surged 5% a day earlier on hopes for aid from the Fed and other central banks.

While the cut gave some investors exactly what they had been asking for, Federal Reserve Chairman Jerome Powell acknowledged that the ultimate solution to the virus challenge will have to come from health experts and others, not central banks. Some traders are also questioning whether more aid is on the way to stabilize the market, while others called the Fed’s move premature to begin with. For more than a few, the Fed’s steepest rate cut since 2008 recalled the dark days of the financial crisis and only added to the dread.

Through it all, markets are still faced with the same quandary that has sent stock prices tumbling 11% since they set a record just two weeks ago: No one knows how far the virus will ultimately spread before authorities can get it under control, and by how much companies’ profits will be shorn because of it.

That uncertainty led to jagged trading across markets on Tuesday. Stocks rallied briefly in the morning following the Fed’s surprise move, but it took just 15 minutes for the gains to evaporate. The yield on the 10-year Treasury fell below 1% for the first time in history as investors ratcheted back expectations for the economy and inflation. A gauge measuring traders’ fear of upcoming swings for stocks jerked wildly up and down through the day.

After popping to a 1.5% gain shortly after the Fed’s announcement, the S&P 500 swung between modest gains and losses for about an hour before turning decisively lower. The index ended the day down 86.86 points, or 2.8%, at 3,003.37. It pared a loss that reached 3.7% in the mid-afternoon, and it marks the eighth drop in the last nine days for the index.

The Fed has a long history of coming to the market’s rescue with lower rates and other stimulus, which has helped this bull market in U.S. stocks become the longest on record. Some analysts said the Fed’s latest cut could provide some more confidence.

”Confidence in markets is crucial,” said Quincy Krosby, chief market strategist at Prudential Financial. “Without confidence, you don’t have a market.”

The Dow had jumped Monday to its best day in more than a decade on rising anticipation for coordinated support from the Fed and other central banks. Even before Tuesday’s announcement, traders were convinced that the Fed would cut rates by half a percentage point on March 18 at its next meeting.

But doubts are high about whether the medicine provided by central banks can be as effective this time around. Lower rates can encourage shoppers and businesses to borrow and spend more, but they can’t reopen factories that have been shut or recall workers out due to quarantines.

After the Fed’s announcement, Powell said the Fed recognizes the fast spread of the virus is a risk for the economy, and he cited concerns from the travel and hotel industries. Powell said that since last week, when several Fed officials had said they saw no urgent need to cut rates, “we have seen a broader spread of the virus.”

The high stakes pushed the Fed to cut rates outside of a regularly scheduled meeting for the first time since the 2008 financial crisis, when investors were considering a complete meltdown of the world’s financial system as possible if not likely. That in itself may have spooked the market, as some investors wondered if the Fed saw things as worse than they were led to believe.

”I don’t believe that market participants woke up this morning thinking we were facing a crisis similar to the global financial crisis,” said Kristina Hooper, chief global market strategist at Invesco. “But that’s what the Fed’s actions suggested to some.”

Markets are likely to remain shaky until investors get a sense of what the worst-case scenario really is in this virus outbreak. Stock markets have been on edge for nearly two weeks, following earlier trepidation by the bond market, as the virus spreads beyond China and companies across continents and industries say they expect it to hit their profits.

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