{"id":12896,"date":"2023-12-27T14:31:51","date_gmt":"2023-12-27T14:31:51","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12896"},"modified":"2024-01-10T17:20:28","modified_gmt":"2024-01-10T17:20:28","slug":"is-the-market-too-optimistic-about-fed-rate-cuts","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/is-the-market-too-optimistic-about-fed-rate-cuts\/","title":{"rendered":"Is The Market Too Optimistic About Fed Rate Cuts?"},"content":{"rendered":"\n

Is the Stock Market Too Optimistic About Rate Cuts?<\/strong><\/p>\n\n\n\n

It\u2019s all about the Fed, again.<\/p>\n\n\n\n

The stock and bond markets have both delivered powerful rallies in recent weeks. The move in stocks has been broad-based, with everything from small-cap stocks to mega-cap tech names performing well. Meanwhile, yields on the 10-year U.S. Treasury bond have sharply declined from near 5% levels in mid-October to sub 4% levels as I write (charts below).1<\/sup><\/p>\n\n\n\n

Bond prices have risen as yields have declined since October<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

And stocks have surged over the past two months<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

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Nearly every expert investor, economist, or financial media pundit will tell you the rallies are tied to the Fed \u201cpause\u201d in interest rate increases, and also to the market\u2019s increasingly dovish expectation for rate cuts in 2024. I\u2019m not here to tell you these experts are wrong. But I do think investors should think about the market and economic outlook in a more nuanced way. Which is to say, remember that the Fed isn\u2019t the only factor driving stock market trends.5<\/sup><\/p>\n\n\n\n

Let me first be fair, though. Fed policy does matter. At the December 12-13 Federal Reserve meeting, officials voted unanimously to hold rates steady, as expected. But what came as a positive surprise was the decision to publish interest rate projections for the following year, which penciled in three quarter-point rate cuts. Markets rallied. The Fed also expressed fairly clearly that fighting inflation was no longer their sole mission, but that they were also focused on growth and employment. In Fed Chairman Jerome Powell\u2019s words: \u201cYou\u2019re getting now back to the point where both mandates [inflation and unemployment] are important,<\/em>\u201d adding that \u201cWe\u2019ll be very much keeping that in mind as we make policy going forward.<\/em>\u201d<\/p>\n\n\n\n

Following this meeting, the market seemed to be pricing in not only the possibility, but the probability of a soft economic landing with a continued downtrend in inflation\u2014which are the conditions needed for the Fed to proceed with cuts.<\/p>\n\n\n\n

But the questions investors need to be asking now are: What happens if the economy grows much more strongly than anticipated? Or what if inflation is a bit stickier than expected, due perhaps to a persistently strong labor market and rising wages and spending?<\/em><\/p>\n\n\n\n

Recall that at the outset of 2023, nearly 100% of economists were calling for an economic recession. It never happened. Instead, the U.S. economy posted GDP growth of 2.2% in Q1, 2.1% in Q2, and a staggering 5.2% in Q3, while adding an average of 240,000 jobs per month. If pretty much everyone was wrong about the recession in 2023, it\u2019s also possible the \u2018herd mentality\u2019 about rate cuts in 2024 is also misplaced. After all, Fed \u2018dot plots\u2019 in recent years have routinely been way off the mark.5<\/sup><\/p>\n\n\n\n

In other words, the market seems to be telling us that rate cuts are needed to sustain the rally. But I disagree.<\/p>\n\n\n\n

I think inflation will slowly but surely continue in a downtrend, which should reaffirm the Fed\u2019s stance on \u201cpausing\u201d rate increases. But I also think the economy could remain fundamentally stronger than most expect, which may also motivate the Fed to hold rates steady versus cutting too soon. In this latter outcome, the market technically won\u2019t get what it wants (rate cuts), and short-term volatility may ensue. But the bottom line would be that the economy is fundamentally strong, which in the medium- to long-term is what will help drive earnings. And that\u2019s what matters most.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

Markets are not \u2018making up\u2019 the possibility of rate cuts in 2024. Fed officials have indicated as much, with the median policy maker\u2019s \u201cdot\u201d forecast for the benchmark Fed funds rate sitting at 4.6% (from the current 5.1%) by the end of next year.<\/p>\n\n\n\n

The issue is that the Fed funds futures market is pricing in a 100% chance of rate cuts next year, which seems to indicate that there is way too much confidence in the Fed\u2019s interest rate projections. As mentioned before, \u201cdot\u201d plot forecasts in recent years have been routinely wrong, sometimes by a lot.
If the market doesn\u2019t get what it wants in terms of rate cuts, that could drive volatility. Investors should expect that. But at the end of the day, a strong fundamental economy and rising earnings matter far more than whether the Fed cuts rates two or three times in the new year. Becoming \u201cFed obsessed\u201d is easy given all the attention the Fed gets, but investors should remember not to overlook the other critical data driving the investment decision-making process \u2013 growth, employment, and earnings.<\/p>\n\n\n\n

To help you stay focused on this data, I am offering you our Just-Released January 2024 Stock Market Outlook Report6<\/sup><\/span><\/strong>.<\/a> This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n

\u2022 Zacks Rank S&P 500 sector picks
\u2022 Current asset allocation guidelines
\u2022 Zacks forecasts for the months ahead
\u2022 Zacks Rank industry tables
\u2022 Buy-side and sell-side consensus at a glance
\u2022 And much more!<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<\/p>\n\n\n\n

FREE Download \u2013 Zacks’ January 2024 Stock Market Outlook Report6<\/sup><\/a><\/span><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Markets rallied as the Fed penciled in rate cuts for 2024, but are investors too confident about the Fed’s interest rate projections?<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-12896","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12896","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12896"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12896\/revisions"}],"predecessor-version":[{"id":12900,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12896\/revisions\/12900"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12896"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12896"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12896"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}