The Fed is out with an emergency rate cut of 50 basis points.
If you were trapped in long positions, this is your early Christmas present for 2020. Monday, I wrote that my ultimate upside target for the SPDR S&P 500 ETF (SPY) was $310 to $312. Here we are... essentially. The initial spike took us above that range by almost two dollars, but it didn't last more than two minutes.
The bigger questions: What if we go red? How bad does the Fed see things getting?
I understand supply chain concerns with many businesses in China closing temporarily, but this emergency cut speaks to the notion that the Fed believes the same may occur in the United States and/or continue longer in China.
Is the move to help interest-rate sensitive smaller companies that could suddenly find themselves in violation of debt covenants should business fall off for several quarters? Will the cut open up the possibility for companies to refinance debt at lower rates or potentially take on new debt at lower rates? Fresh capital could help a company weather the storm, and potentially take advantage of the opportunities depressed prices may bring.
We'll get a little more insight from the Tuesday morning Powell press conference, but this rate cut is only going to add to uncertainty and volatility. The proximate cause for the move can be spun by either bulls or bears in their favor, but ultimately the price action is going to tell us what the money believes here.
Ultimately, it should create another round of consumers refinancing their personal debt and mortgages. That could have a positive impact on spending in the second half of the year. I don't think we want to see it push home prices higher though given that rates don't really have anywhere to go but up from these new levels. They could remain flat, and that would be fine, but if we see a push higher in prices, the eventual rise in rates could become crippling.
I view this as an ineffective overreaction providing a possible short-term benefit of six to 12 months but increasing long-term economic risks higher once the impact of the virus wanes.
With (SPY) highs around $313.50 and lows around $305.50 (5 minute closing bars), everywhere in between feels like a crapshoot Tuesday. I'd rather wait for more information than jump in front of the press conference long or short.
For open positions, I'd prefer a hedge or collar strategy and let this play out for a few days. We've had great opportunities long, short, and intraday over the past week. We're going to get many more as I see it, so why play into one with a big wildcard today? The risk versus reward is all over the map, and that's a game I'll enjoy watching others play.
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