Published March 22, 2024
Coming into 2024, many investors expected the first Federal Reserve cut in interest rates to occur in their March meeting. That cut could be followed by as many as five more cuts in 2024. Though we are not market forecasters, that reading seemed excessive to us. After all, the economy was humming along pretty well coming into 2024. What sort of economic weakness would occur to cause the Fed to shift to a very aggressive rate cut regime? It didn’t make sense. Over the first quarter of the year, investors have pushed out their expectations for rate reductions. Surprisingly, that has had no effect whatsoever on the stock market, as corporate earnings have blitzed estimates and money has flowed into stocks.
As reported by the Wall Street Journal, this week, “as expected, the Federal Reserve held interest rates steady at its policy meeting that concluded Wednesday. Officials still expect three rate cuts in 2024, which is actually the same thing they said back in December. It turns out that firmer-than-expected inflation in the first two months of the year hasn’t derailed the central bank’s plans.
Stocks rallied to fresh records, in part because traders think the odds of a rate cut by June have gone up. According to CME Group’s FedWatch tool, those odds are north of 70% as of Wednesday afternoon, up about 15 percentage points from a day earlier.
But a stronger-than-expected growth environment has raised policymakers’ outlook for longer-term rates: Fed officials now forecast fewer rate cuts in 2025 and 2026. And the longer-term “neutral” rate needed to keep the economy at full strength with steady inflation is now expected to be 2.6%, up slightly from 2.5% in December.”
Here’s the expected path for interest rates over the coming year:
And what of those recently elevated inflation numbers? How do we square that with a flying stock market and rampant consumer spending?
Here’s one take suggesting, as we’ve noted in the past, that inflation reporting on shelter is badly lagging:
Shelter remains a thorn in the side of the CPI data…
@RyanDetrick: CPI up 3.2% annualized the past 6 months. Take out shelter, it dips to 1.8%. Yes, shelter matters, but when 60% of people own a house and many are locked in at rates sub 3.5%, how much does it matter?
And those corporate earnings have estimates and market projections being pushed upward:
So, think of the above this way: the Fed has not changed its outlook since December – three rate cuts projected for 2024 then, three rate cuts still the outlook. Meanwhile, earnings and economics are better. That rates will likely remain higher for longer is explained by BETTER economic growth. That’s a good thing. And the market rally carries on.
Market Update
Another AI-fueled rally lifted shares Monday after a report suggesting that Apple could use Google’s AI engine sent the search company’s stock sharply higher. The broad market rode the rally to a +0.6% gain. The move higher continued Tuesday (+0.6%) with energy shares continuing their recent lift. The rally accelerated Wednesday when the Fed confirmed a projection for three interest rate cuts in 2024. Given recent sticky inflation reports there has been some concern that any cuts would be off the table. The broad market indexes rose +0.9% with a higher move among more interest rate-sensitive sectors, like financials, which broke out again. Another gain Thursday on news that Switzerland became the first major central bank to cut interest rates. Semiconductor maker Micron posted sharp gains on better earnings while European and Japanese stocks hit record highs. The broad U.S. market added +0.2% Thursday weighed down by a -4% drop in Apple shares while smallcap stocks continued their surge on lower interest rates. Friday saw markets digest the week’s gains with a mixed performance while smallcap shares gave back a portion of their sharp two-day run. FedEx became the latest company to post strong earnings and see their stock surge higher.
The Fed reiterated their message from December, which seemed to please investors this week leading the S&P 500 (SPY) to a +2.23% weekly rise. The Nasdaq 100 (QQQ) rose +3.01% while smallcap stocks (IWM) gained +1.57%.
Warm wishes and until next week.