Investing

With stocks in a bear market, the Fed cuts rates to zero: Here's what else to expect this week

Twenty/20

Without question, recent weeks have been rough for investors. The U.S. stock market tumbled into a bear market for the first time in more than a decade, and the major benchmarks racked up their worst daily declines in more than 30 years on Thursday before roaring back on Friday.

Behind the market's recent turbulence are concerns that the novel coronavirus will slow global economic growth, possibly plunging the U.S. and other countries into economic recessions. Since hitting an all-time high on February 19, the S&P 500 was down about 20% through Friday, and it tumbled 8% in early trading on Monday.

In an effort to stem the market's losses, the Federal Reserve has sprung into action. On March 15, the central bank cut its benchmark interest rates to near zero and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus. "We will maintain the rate at this level until we're confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals," Chair Jerome Powell said following the decision.

Those moves followed a prior rate cut by the Fed on March 3 and plans announced last week to pump more than $1 trillion into the financial system in an effort to calm market tumult.

Policymakers are scheduled to convene for one of their eight annual meetings in the week ahead, and while traders had expected another rate cut from this meeting, now they'll look for more reassurance from the Fed. In addition to developments with the coronavirus, Wall Street will monitor a report on retail sales to see if the early part of the U.S. outbreak affected consumer spending in February.

Here's what to watch in the stock market during the week ahead — and how the news could affect your bottom line.

Traders bet the Fed would cut interest rates near zero — and it did

What's happening: Heading into the weekend, traders were betting that interest rates were headed even lower, following the Fed's emergency rate cut earlier this month. That ultimately happened on Sunday, days before policymakers are scheduled to meet on March 17-18. 

Now that the Fed has lowered its target for the federal funds rate by 1 percentage point, to a range of 0% to 0.25%, traders will closely watch a post-meeting statement, along with a press briefing by Chair Powell, for signs that the Fed will continue to step in as necessary to help the market.

Why it matters: The Fed cut rates as aggressively as a majority of traders expected, marking only the second time in history that rates have been at this level. Policymakers lowered interest rates to near zero in 2008 during the financial crisis and kept them in that range until 2015.

The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken, and mirrored its efforts during the financial crisis that were rolled out over several months.

What it means for you: The Fed is taking action in an effort to stabilize markets and stimulate economic growth. With interest rates near zero, it will become even cheaper for consumers and businesses to borrow money. If you're considering refinancing your mortgage, ask yourself two important questions first. And recognize that lower interest rates mean you'll earn less on your savings account.

Economists forecast modest slowdown in consumer spending

What's happening: The monthly retail sales report for February is scheduled for release on Tuesday, March 17. This details how much American consumers spent on things like groceries and clothing.

Economists currently forecast that spending slowed slightly month-over-month compared with January. That's significant because this report will capture spending activities at the early onset of the coronavirus outbreak in the U.S., and traders will be watching to see Americans if were already cutting back on purchases.

Why it matters: A primary reason the stock market has been tumbling is that traders are worried that American consumers and businesses will cut back on spending. A preliminary reading released on March 13 by the University of Michigan showed that sentiment has already taken a hit as a result of the coronavirus, and "additional declines in confidence are still likely to occur as the spread of the virus continues to accelerate."

Traders on Wall Street track the monthly retail sales report closely because consumer spending accounts for more than two-thirds of U.S. economic growth. Given the uncertainty about the virus, traders are trying to predict how much the coronavirus will affect consumer spending in the months ahead.

What it means for you: Depending on where you live, you may not have made radical shifts to your shopping habits yet as a result of the coronavirus. However, people in some areas are panic-buying items like toilet paper, while gathering places like sports arenas, theaters, and museums have been shuttered. And the overall amount of money spent, or not spent, matters to the overall economy.

If you're worried about the coronavirus, experts suggest you skip buying masks and make these smart purchases instead.

The bottom line

With the U.S. stock market now in a bear market, the focus on Wall Street in the weeks ahead will be on how the coronavirus can be contained and its potential impact on economic growth. While these market events can seem scary, remember that they can be good for long-term investors

At times like this, it's important to keep your financial goals in mind and stay focused on the long-term merits of investing. That's because the market has always bounced back, even from worse sell-offs than the current one.

Short-term turbulence can be a good opportunity to buy stocks at lower prices. Stick to some of the tips for beginner investors, which are sound no matter how long you've been investing.

Finally, continue adding money regularly to your portfolio, focusing on ways to manage risks, and resist any urge to sell investments out of panic. No matter what happens in any given week, it's important to keep perspective and avoid letting headline news affect your long-term investment strategy.

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