Emergency rate cuts won't be enough to save the unstable stock market, top market strategist warns

A currency trader wears a face mask at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Monday, Feb. 24, 2020. (AP Photo/Ahn Young-joon)

  • Traders are boosting their bets on central banks cutting rates as coronavirus deaths spike, but such policy won't do much for stock markets, Seema Shah, chief investment strategist at Principal Global Investors, said Monday.
  • Rate cuts primarily strengthen borrowing and, in turn, demand. Such policy won't insulate markets "against supply-side concerns," Shah wrote in an emailed statement.
  • Investors should pivot to protecting their portfolios and avoid buying stocks at lower prices, she added, as markets have already demonstrated "over-complacent" behavior toward coronavirus news.
  • Shah recommended investors watch European companies for profit warnings, as the export-heavy economy faces great risk from a manufacturing slowdown.
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Investors looking to buy stock during Monday's dip shouldn't expect much help from central bank policy, Seema Shah, chief investment strategist at Principal Global Investors, said Monday.

Traders are boosting their bets on central banks cutting rates as coronavirus fears roil markets. Lower rates bring cheaper borrowing, and cheaper borrowing often brings increased spending. Investors are betting on two interest rate cuts from the Federal Reserve in 2020, according to Bloomberg, but Shah doesn't think such action would provide markets with the cushion many are looking for.

Rate cuts might provide a small boost to demand, but coronavirus' hit to global supply chains isn't easily averted and can drag stock prices lower, the strategist said. Apple warned on February 17 that its next-quarter revenue will land below initial guidance as "temporarily constrained" iPhone supply and weak demand in China dented sales. Other companies including Tesla, Starbucks, and Nike have alerted investors to earnings risk related to the outbreak.

The market just learned that rate cuts won't "insulate it against supply-side concerns" and push stocks higher, Shah said in emailed comments.

"While further Fed cuts, and potentially an ECB cut, may be priced in, easier liquidity conditions may be insufficient to prop up equity markets if coronavirus concerns continue to escalate," she wrote. "Monetary policy is not optimized for addressing a shock such as this."

Global stocks tumbled in Monday's trading session after a spike in virus-related deaths outside China fueled new fears that the outbreak will harm global growth. Investors flocked to safe-haven assets, driving gold near $1,700 per ounce and pushing the yield of the 10-year Treasury bond to its lowest-ever level.

Some analysts viewed Monday's drop as a prime buying opportunity before the record-long bull run resumes. US stock prices sat at record highs as recently as last week, already surging higher after investors shrugged off initial reports of the virus' severity. The "over-complacent" reaction seen earlier in February should motivate investors to take defensive positions before another plunge, Shah said.

"Given these over-valuations and market susceptibility to negative news flow surrounding the outbreak, investors should look to protect their portfolios and resist the urge to buy the dip," the strategist wrote.

Shah recommends investors watch for new profit warnings in Europe to signal markets' next step lower. The continent's risk asset valuations "may have peaked," according to the strategist. Europe's economy relies heavily on export activity, and its entire stock market is at risk if coronavirus harms manufacturing activity, Shah said.

Principal Global Investors manages $476.4 billion worth of assets.

The S&P 500 was down about 2.7% as of 3:15 p.m. ET Monday.

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