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There’s a great deal of consternation that the stock market reacted poorly to the “surprise” Federal Reserve 50 basis points interest rate cut last Tuesday. The cut was said to be ineffective. Well, there are few things wrong with that headline.

First, it wasn’t a surprise to veteran investors or folks who read this newsletter. We pointed out as much the previous Friday. Secondly, because markets are a discounting machine it was the nearly 5% equity rise on Monday which was the “reaction.” Markets already expected the cut Monday. Tuesday was profit taking.

Lastly, as I’ll demonstrate below, the initial stock market reaction is not ultimate market reaction (and given the effect on the yield curve, the effect should be ultimately positive).

The market’s wide swings in both directions each day last week had the effect of focusing more and more investors on the worst case scenario—that either (a) the solution to COVID-19 requires governments to resort to some form of clampdown or martial law, which drives the world in recession, or (b) COVID-19 becomes pandemic and kills consumer confidence sufficiently to drive a recession worse than 2008.

While these are plausible outcomes, they don’t seem to be the central case. In fact, hardly so. Consider oth...

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