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Interest rate cuts aren't helping crashing stock markets

The stock market doesn’t seem to know what to make of COVID-19. Last week markets suffered record breaking selloffs reporting, on Thursday, its worst day since 1987.
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The stock market doesn’t seem to know what to make of COVID-19. Last week markets suffered record breaking selloffs reporting, on Thursday, its worst day since 1987. However, Thursday’s fears appeared to be erased by Friday as the Dow surged 1,900 points, eliminating most of the historic declines experienced the day before. While investors may have been able to sleep easy Friday night, it wouldn’t last long.

Over the weekend and before Monday morning’s open, the stock futures market hit its “limit down” levels meaning they could not be traded for anything less.  Investors were not expecting Monday March 16 to be a happy day after the ominous signs sent by the stock futures. Unsurprisingly they were right. 15 minutes after markets opened this morning, trading was halted as the S&P 500 dropped 8.14%. The TSX experienced the same fate after a 10.2% drop in the first 15 minutes.

Monday’s drop comes after a decision by the fed to lower the interest rate by 100 basis points to near zero levels. This suggests that the lowering of interest rates didn’t have the calming effect on the market that some had hoped.

Rick Rule president and CEO of Sprott U.S. Holdings had been skeptical all along. After moves by both the U.S. Federal Reserve and the Bank of Canada to lower interest rates twice last week, Rule said that lower interest rates would not have the same impact as they did in 2008. 

“My suspicion is that the marginal effect of lowering interest rates and the marginal effect of new liquidity in the system, where interest rates are already too cheap and there’s already too much cash in the system, will be small,” said Rule. 

Lowering interest rates was much more effective 20 years ago when interests rates were higher. Both the Canadian and U.S. economies have been using low interest rates to stimulate the economy since the 2008 recession. The problem is that only works for so long, says Rule, and now we’re seeing diminishing returns.