Opening Statement from the August 2019 Dividend Gems
Originally published on August 19, 2019
Global Rate Cuts Signals Problems
As discussed in 2018, for the first time since the financial crisis central banks around the globe entered a trend of interest rate hikes. But things have reversed over the past couple of months, as we now see a trend of rate cuts. The Fed’s questionable rate cut serves as further impetus for central banks throughout the globe to cut rates. Recently, Brazil’s central bank announced a 50-basis point cut in the Selic rate pushing it to a new record low of 6.00 percent. Meanwhile, New Zealand cut rates by a larger than expected 50-basis points on August 7. The same day Thailand unexpectedly cut rates by 25-basis points to deal with a decline in export trade, India also slashed rates by 35-basis points, followed a day later by a 25-basis point cut in the Philippines. We believe there is a good chance the ECB will cut rates in September. And Japan’s central bank is also likely to cut rates in September.
Even more pressure is being placed on the Fed to lower rates in 2019 considering the recent cut was largely based on escalating trade tensions between Washington and Beijing. As well, the 10-year U.S. Treasury yield recently collapsed to 1.53 percent signaling a high chance of another cut in September. And there’s a good chance of two rate cuts for 2019. But if the Fed cuts rates in absence of supportive economic data, it could lead to major problems down the road.
Moving forward, investors should focus more on the Fed’s communication as opposed to the economic data because monetary policy is no longer being “data driven.” It’s being determined based on speculation in addition to pressure from the White House.
Stock Market Reacts to the Rate Cut
Investors responded negatively to the Federal Reserve’s 25-basis point rate cut on July 31 by selling stocks. We believe the July rate cut had already been factored into the stock market during the weeks leading up to the FOMC meeting (“buy on the rumor”).
Once Powell announced the rate cut, a “sell on the news” reaction caused investors to take profits. We discussed this scenario prior to the FOMC meeting (July 2019 Intelligent Investor & Market Forecaster and session 11 of the Securities Analysis & Trading Webinar).
The day following the rate cut (Thursday, August 1) the selloff in stocks continued, but was exacerbated
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