The Federal Reserve’s impromptu rate cut this week was a lump of coal for Wall Street.
But to me, it’s an early Christmas gift…
After last week’s coronavirus fear-driven sell-off – the worst since the 2008 financial crisis – the Fed took emergency action and cut rates by 0.5% on Tuesday.
“We saw a risk to the outlook for the economy and chose to act,” Fed Chair Jerome Powell said at a news conference shortly after the rate-cut announcement.
Despite the Fed’s emergency stimulus, the Dow dropped nearly 3%.
And the bond market flashed warning signs, too. The yield on the 10-year U.S. Treasury bond fell briefly below 1% for the first time ever.
Now, most investors probably thought a rate cut would ignite the market. After the last four rate cuts, the market gained an average of 1.1% the same day.
So why did it plunge this time instead?
Well, the Fed – in coordination with other major central banks – clearly signaled a rate cut was coming. It wasn’t a surprise. In fact, it just whetted Wall Street’s appetite even more.
And I should know. I spent nearly two decades working at top Wall Street firms like Cantor Fitzgerald and Jefferies.
Wall Street is always forward-thinking. It’s not pricing today, but tomorrow. It expected this 50 basis-point cut.
But I believe Wall Street traders wanted a more aggressive cut of at least 75 basis points (0.75%)… and a more soothing statement regarding the upcoming G7 meeting.
Now, they fear the Fed won’t have any more weapons in its arsenal to stimulate the economy if this coronavirus outbreak worsens.
And volatility persists…
At writing, markets are up around 2% on Wednesday morning. This comes on the heels of Joe Biden’s Super Tuesday victory and new Chinese coronavirus cases slowing down. There’s even news of Chinese factories coming back online relatively soon.
These headlines are influencing the latest market moves. At the end of the day, it could go either way.
But as usual, the mainstream media is missing the forest for the trees. The Fed’s rate cut will be the gift that keeps on giving for stock investors.
And today, I’ll share with you why…
Rate Cuts Boost Stock Returns
Again, the market generally rises when the Fed cuts rates.
Here’s why that’s great for stocks…
Lower rates mean consumers pay less interest. It encourages them to put off saving and spend more of their money now. And companies also benefit since borrowing becomes less expensive. So they can invest more in expansion.
This all helps stocks soar higher.
Plus, the dividend yield on the S&P 500 is 1.94%. With Tuesday’s rate cut, the yield on the 10-year Treasury is now 1.02%. So the average company is paying more than ultra-low-risk T-bills.
And that doesn’t even account for taxes, which makes holding stocks even more attractive than bonds…
Dividends are taxed at 23.8% (long-term capital gains). But bond income is taxed as ordinary income – which has a maximum federal tax rate of 40.8%.
So if you’re an investor looking for income, you can see in the table below that you’d end up with more money in your pocket with stocks at current yields:
|Advantage of owning stocks over bonds||147%|
When it comes to paying taxes on your investments, stocks are clearly the better place to be.
And if you add in the possibility of more rate cuts to offset the economic impact of the coronavirus… why would you buy anything else?
You Know the Drill
If you’ve been following me long enough, you know I’m a data-driven guy. I love to dig deep into the numbers.
That’s why I spent half a dozen years and hundreds of thousands of dollars to develop my “unbeatable” stock-picking system that tracks big-money buying.
I used my experience from nearly two decades at prestigious Wall Street firms – routinely trading more than $1 billion worth of stock for major clients – to make sure it’s highly accurate, comprehensive, and effective.
It scans nearly 5,500 stocks every day, using algorithms to rank each one for strength. It also looks for the movements of big-money investors.
And it’s the same system I used to identify triple-digit winners like The Trade Desk (TTD), Paycom Software (PAYC), and SolarEdge Technologies (SEDG) for my Palm Beach Trader subscribers.
But it doesn’t only identify individual stocks… It can also track what the big money is doing in the broad markets, too.
And as you can see, my big-money index continues to indicate that sellers are taking over…
When the ratio is at 80% (see the red line above) or more, it means buyers are in control and markets are overbought. And when it dips to 25% (the green line) or lower, sellers have taken the reins, leading the markets into oversold territory.
Although we’re not near oversold levels yet, the index is trending lower – which means lower prices are ahead.
And as I told you on Monday, these market sell-offs last about three weeks on average. So my data suggests we’ll see a bottom around the third week of March.
You know the drill: Buy high-quality companies on your shopping list on the way down.
You’ll get them at great discounts during this fear-induced sell-off – and they’ll gun higher once the effects of the Fed’s rate cut eventually kick in.
Editor, Palm Beach Insider
P.S. As I mentioned, now’s the time to buy high-quality stocks while they’re on sale during this pullback.
And my “unbeatable” system tracking big-money buying scans nearly 5,500 stocks every day to identify which ones are the best of the best. It can help you spot them, too – and ride them to profits as Wall Street’s buying pushes them higher.
I put together this special presentation so you can see how it all works – including how my system can find these superstar companies with the potential to grow 1,000–10,000% before anyone else.