Private Client Group

May 6th, 2024

Fed Holds Rates Steady, A Closer Look At Q1 GDP, High Cost Of A Sweet Tooth

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In today’s Steady Investor, we take a look at key factors that we believe are currently impacting the market, such as:

• Update on the Fed’s inflation process
• A look into U.S. GDP in Q1
• The cost of having a sweet tooth

The Federal Reserve Holds Rates Steady with a Cautiously Optimistic Tone – The decision was one nearly every investor anticipated: the Federal Reserve decided to hold rates steady at a range between 5.25% and 5.5%. With Q1 inflation data showing ‘sticky’ prices, the Federal Reserve has shifted into a “wait-and-see” stance versus projecting confidence that rates would come down in 2024. But while Fed Chairman Jerome Powell has seemingly raised the bar for rate cuts in 2024, he has also made the point that there is no imminent or foreseeable need to hike rates, either. Even still, the Federal Reserve added some candor to its policy statement about the road to lower inflation in 2024, citing a “lack of further progress” in the first three months of the new year. This statement suggests the Fed sees the inflation fight as stalled versus moving in the right direction, as was largely the case throughout 2023. The larger question for 2024, however, is if hotter-than-expected inflation data persists beyond Q1, which would continue to frustrate the Fed and may move the needle on policy to an even more restrictive stance. Fortunately, for now, neither the market nor the Fed appear to believe that this inflation outcome is likely. Instead of tightening policy further, the Fed decided to slow the reduction of its $7.4 trillion asset portfolio, which in effect is a less hawkish move. And in Treasury markets, 10-year U.S. Treasury bond yields fell following the policy announcement.1

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U.S. GDP in Q1: Better than Advertised – The headlines warned of a slowing economy. The Bureau of Economic Analysis reported that U.S. GDP grew at a 1.6% annualized rate in Q1, down from 3.4% in Q4 2023. Combined with the fact that inflation prints (both CPI and the PCE price index) came in hotter-than-expected in the first three months, mutterings of stagflation became more common. But a more detailed look at the initial GDP numbers shows an economy that’s stronger than appreciated, in our view. The GDP calculation has some quirky features, such as counting imports and inventory drawdowns as negative contributors to growth. Investors would not be wrong to think of rising imports as a sign of strong domestic demand, but the GDP calculation does not see it that way. In Q1 2024, imports took a full percentage point off the U.S. GDP number, since imports grew by over 7% in the first three months. Inventory depletion pulled -0.4% from the headline figure, and government spending also slowed. But missing from these data points is the contribution of the private sector, i.e., consumer spending, business investment, and housing. If we narrow our focus to just these private sector components, we find that they grew 2.6% annualized in Q1 2024, which marks a consistent growth rate from the second half of last year. In other words, the private sector of the U.S. economy held up just fine in Q1 2024, which arguably explains why stocks held up so well, too.3

Spending More on Dessert – Commodity prices are notoriously volatile, impacted by shifting trends in supply and demand, and often subject to things like weather disruptions and geopolitical flare-ups. In 2024, no commodity has been more volatile than cocoa. Bad weather in West Africa, which grows most of the world’s cocoa, sent prices rising substantially over the past several months. Then speculators and futures traders started to move into the commodity, which resulted in cocoa’s futures price rising from a little over $2,000 per metric ton in early 2023 to over $11,722 per metric ton on April 19. At its peak, the price of cocoa had surged 42% above its all-time high set in 1977, which happened to be another year where growing conditions were not favorable in West Africa. Fortunately for candy and dessert aficionados, prices have plummeted since those highs, falling about 30% over the past couple of weeks.4

Finding Silver Linings in a Volatile Market – As we experience volatility in today’s market, it may be hard to find silver linings, but that doesn’t mean they aren’t there. To help give you additional insight into how you can make the most of unpredictable times, we recommend reading our guide “Using Market Volatility to Your Advantage5.”

This guide can help you learn about our insights, based on decades of experience, about how a volatile market may be able to actually help investors refine their strategies and potentially generate solid returns over time.

You’ll get our ideas on:

• How market volatility can “shake up” complacent investors
• Potential bargains that may be uncovered through turbulence
• Why volatility may help prevent overheating and market “bubbles”
• What history shows us about opportunities for steady investors in turbulent markets
• Plus, more ways you may be able to benefit from a volatile market

If you have $500,000 or more to invest, download this free guide today by clicking on the link below.

Disclosure

1 Wall Street Journal. May 1, 2024. https://www.wsj.com/economy/central-banking/fed-says-inflation-progress-has-stalled-and-extends-wait-and-see-rate-stance-51b74bbf?mod=hp_lead_pos1&mod=djemRTE_h

2 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.

3 Business Insider. 2024. https://www.businessinsider.com/us-economy-positive-outlook-forecast-gdp-growth-slowing-strong-signals-2024-5

4 Wall Street Journal. March 15, 2024. https://www.wsj.com/finance/commodities-futures/your-sweet-tooth-is-getting-expensive-a98bb387?mod=djemMoneyBeat_us

5 ZIM may amend or rescind the free guide offer, Using Market Volatility to Your Advantage, for any reason and at ZIM’s discretion.



DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.

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