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Stocks in Freefall — Why Investors Are Looking past the Fed’s Cut to Zero

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Stocks opened shockingly lower Monday, falling as much as they would during an entire market correction and shrugging off the Federal Reserve’s interest rate cut. 

The S&P 500 fell 10.6%, it’s lowest level since the bottom of the late 2018 correction. The other two major U.S. indexes fell more than 11%. 

This comes after the Federal Reserve induced its third round of monetary easing this year, sending the Federal Funds rate as low as 0%. The coronavirus continues to worsen, keeping people and business around the globe shit down from most activity. 

The 10 year treasury yield only fell to 0.74%, as it had fallen below the fed funds rate last week. Bond investors — as well as stock investors — were clearly pricing in more rate cuts and the probability of a recession

But there isn’t much the Fed can do, as added liquidity cannot dampen the fear of getting sick. 

“The Fed will be unable to put much of a floor under the market, only Congress and the Executive Branch will be able to do that,” said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance in emailed remarks to reporters. 

"While the Fed slashed rates yesterday to help alleviate the economic stress the virus has put on the economy—it doesn’t have many more levers to pull now if things get worse,” said Mike Loewengart, head of investment strategy at E*Trade. “The market seems to be interpreting recent Fed activity as a sign of worse things to come.”

Most investors and strategists now accept that the market is pricing in a recession, especially since that gap in expected return on stocks versus that of safe bonds has widened. Credit reads have also widened, which does support the Fed’s position that it should ease financial conditions. The Fed also bought mortgage securities to lower their yields, supporting housing demand. 

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