FEDERAL RESERVE and INTEREST RATES - Q1 2020
It is crucial for stock market investors to pay attention to the bond market. I have been commenting for months that the bond market could be signaling a potential problem ahead.
The Federal Reserve Bank unexpectedly cut rates 0.50% on Tuesday 03/03/2020 (it was unexpected because it was ‘in between regularly scheduled Federal Reserve Bank meetings’). What sent shocks through the stock market on Tuesday was the magnitude of the rate cut.
The following two graphics illustrate the point, over the past 30 years such cuts have happened on the cusp of significant stock market volatility (losses). Both graphs are of the S&P 500 with the Federal Reserve rate cuts noted.
Here we can see that significant rate cuts started in 2008.
This graphic goes back further, to the 1990s (source: CNBC).
Does this mean that trouble is ahead? In my opinion probably, given the weakness in earnings, the impact of the Corona Virus, and the high valuations in the stock market. Investors need to reassess their portfolios in terms of the risks that they are taking.
LPL 1-959895
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S&P 500 Index: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The index is a capitalization weighted index of the 500 large companies listed on various stock exchanges (such as the NYSE or NASDAQ). The S&P 500 was developed and continues to be maintained by S&P Dow Jones Indices, a joint venture majority-owned by S&P Global. The S&P 500 differs from the Dow Jones Industrial Average and the NASDAQ Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market.
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Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.
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