Friday, March 6, 2020
The Federal Reserve cut interest rates 50 basis points (bp) before its scheduled March 18 meeting. The last time the Fed felt compelled to enact a 50-bp cut between meetings was on October 8, 2008, shortly after the Lehman Brothers collapse had resulted in a global market meltdown — certainly not an encouraging comparison. The Dow Jones Industrial Average had a record 5% daily gain on Monday and followed that with a nearly 1,200-point rise on Wednesday. Surely, this means the worst is over, right? Maybe not. Prices have moved up and down thousands of points in the past few weeks, which tells me the market is confused and reacting to the latest news. Let’s look at this from a 50,000-foot level.
The world is a big place, so I focus on the “Big Three” to C-U-E me into what drives two-thirds of the global economy. C — China has been virtually shut down for two months; as the world’s manufacturing hub for technology and pharmaceuticals, this is a serious shock to the global supply chain. U — the United States is the sole economic powerhouse, but its manufacturing sector was in contraction for five months before its latest ISM report inched into expansion with a 50.1 reading. E — Europe faces multiple challenges: the coronavirus outbreak puts France and Italy at risk of recession, and Germany has real problems in its manufacturing sector. But that is not all, because there is also a demand problem now. No one is traveling, international events are being cancelled, and the all-important business traveler is staying home. Shipping is at a standstill, further hurting the supply chain; countries are shutting down schools — all of them.
What matters is bottom-line corporate earnings growth, preferably supported by top-line revenue growth. At this point, both FactSet and Refinitiv analysts’ consensus estimates for 1Q20 are positive. The market seems to want to believe it but the global economy, not so much.
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