On Thursday, many investors were baffled by the price action in the S&P, which traded in the red, despite catalysts that should have been bullish.
Bulls have been calling for rate cuts, saying central banks around the world needed to get more aggressive in their attempts to keep the global economy growing.
And on Thursday bulls got what they wanted – on many fronts:
- The ECB cut its main interest rate to a record low of 0.75 percent and its deposit rate to zero.
All things considered, shouldn’t the market have rallied?
Dan Greenhaus, Chief Global Strategist at BTIG tells us not all rate cuts are created equal. “There are good rate cuts and bad rate cuts,” he says.
These were bad rate cuts. Here’s why.
The knee-jerk reaction from pro investors is to interpret cuts as a sign of something bad. And unless there is a downstream catalyst to make them optimistic, Greenhaus says they won't buy risk assets such as stocks.
To support his thesis Greenhuas points to the price action in the S&P about a decade ago. “During 2001 and 2002, the Fed cut rates and the S&P fell,” he reminds.
Greenhaus thinks the environment is very similar.
That is, rather than triggering optimism, rate cuts will be interpreted as “The economic landscape is worsening and earnings expectations are coming down,” he says.