The last time we saw an emergency rate cut of this size between scheduled Fed meetings was the 2008 Lehman Brothers crash, 12 years ago. We are not convinced that the global economy has gotten brittle enough to justify a full 0.50 percent cut, but we aren't running the Fed either.
What's clear is that central bankers are nervous enough to take unusual steps to cushion the economy from any viral shocks. If their caution is justified, we'll be grateful. And even if the virus outbreak doesn't reach a scale that requires so much help, it's going to take time to know for sure.
In the meantime, Wall Street will have plenty of liquidity to play with. Yesterday's rate cut lowers the floor on borrowing costs to its lowest level since mid-2017. Back then, the S&P 500 supported a 17.7X earnings multiple, so it isn't unreasonable for stocks to hold up roughly where they are now. On one hand, interest rates were tightening back then, while the futures market now suggests at least one more loosening move in the next few months. We'll have to see whether investors will applaud another cut at this point, but the trajectory from here is ultimately supportive.
Of course back in 2017 stocks were expanding their earnings nearly 10% a year . . . and this was before the tax cuts kicked in. Very few economists see that pattern repeating now, especially if the virus truly does become a contagious drag on consumption and corporate planning. Even so, if the prospect of rate relief in the near term balances against a slower growth profile ahead, stocks look well supported here. There is definitely no rationale for mass selling. At worst the market would be a hold until the virus plays itself out, and as we've discussed BMR stocks have superior growth-to-valuation characteristics compared to the market as a whole.
We've already seen several of our stocks surge with the market in relief on Monday and then hold onto much of that gain through the process of adjusting to the Fed's sudden move. Most of them pay high dividends so they're more attractive as Treasury yields fall. With 10-year bonds barely paying 1% now, (an all-time low), it doesn't take a big dividend to compete for income-oriented investor attention. Stocks that gained ground yesterday are middle-of-the-road dividend payers like Coca-Cola (KO), which doesn't even yield 3% . . . but that's 2 percentage points higher than what people can get in the bond market.
In our world, the early winners of the Fed's pivot include Municipal Bonds, which are soaring as the differential between their tax-free distributions and taxable Treasury dividends narrows. Nuveen High Yield Municipal Bond Fund (NVG) now pays 4.6% tax free, (up to 7.1% taxable) which is extremely attractive when you consider that Treasury notes are well below 1% before tax. Invesco Municipal Trust (VKQ) is in a similar place with a 4.5% yield. All in all, our High Yield portfolio is up 3% this week.
Likewise, several of our REITs are bouncing back fast. Equity Residential (EQR), JBG Smith (JBGS) and Welltower (WELL) have all seen their share of investor interest this week. Their yields weren't huge a few weeks ago, but as some investors lighten up on Treasury holdings in order to chase reasonable income, they look a lot better now. That's all it takes in this market. These are the real safe havens. And when reaction to the Fed calms down, we'll see the upside spread.