Thursday's Market Minute: The Playbook Isn't Working

A monster rally in stocks yesterday is once again giving way to more selling this morning. Wednesday’s move was no doubt impressive, but was missing some of the key ingredients bulls are looking for – namely, leadership in a sector other than utilities and real estate, which trade closely with bonds. And bonds are up, a lot.

Still, even after Jay Powell's emergency cut, Fed funds futures are pricing in two more cuts at the March meeting in a few weeks. So the bond market is rallying after his attempt to signal support for the economy, and the stock market is lower. It’s only been two days, but that means the market is unimpressed with Powell’s move. One conclusion is that investors are so paralyzed by coronavirus fear that the selling won’t stop until the virus does. Another is that the market is viewing monetary support for a viral threat as fitting a square peg into a round hole

 Even Powell himself acknowledged this, but did the cut anyway. Now, investors must ask themselves whether the decade-long playbook of reacting to Fed action by buying bonds and buying stocks will be the same this time. So far, it’s looking like just the bonds part. Then there’s a third conclusion, the one bears favor: that the virus is just a means to an end; a way to shake loose investors who have been too complacent for too long, and companies that have been too frivolous; that the decline in the market will finally be the tipping point as financial conditions tighten and expose the cracks in the U.S. economy. Either way, it’s looking like the old playbook isn’t working.

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