Don’t fight the Fed.
It’s one of the oldest rules on Wall Street.
It also continues to be excellent advice, considering that investors buy risk assets like stocks when the Federal Reserve is hiking rates often lose money… either through a falling stock market or by not putting their money to work into other assets. The S&P 500 was flat during the Fed’s recent hiking cycle from March 2022 to September 2023.
Conversely, those who don’t invest in stocks when the Fed is cutting or holding rates steady often miss out on strong market gains. The S&P 500 soared more than 50% during the Fed’s rate cutting cycle of March 2020 to March 2022.
This year, however, is a bit different.
After the Fed took its target interest rate from near zero in March 2022 to above 5% by July 2023 – the most aggressive rate hiking cycle in U.S. history – it seems that Chairman Jerome Powell and his colleagues are suddenly content to sit on their hands.
That is astounding. Why?
Consider that as recently as January the market expected as many as seven rate cuts this year.
But Powell and other Fed officials have been busy tamping down those expectations.
Just last week, Powell told an audience at Stanford Business School that…
Reducing rates too soon or too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2%.
And last week, Atlanta Fed President Raphael Bostic said he sees just one rate cut this year.
The markets have clearly listened to these Fed warnings.
Today, the futures market assigns a 64% chance of the rate being between 4.5% and 5% by year end. That’s just two cuts in 2024… maybe three.
Not in the Game
So, in a sense, the Fed has taken itself out of the game for 2024. And that’s no surprise to those of us who have been watching.
Consider…
- At 3.2%, headline inflation is still above the Fed’s long-term target of 2%.
- Despite high interest rates, the labor market continues to flourish – with more than 300,000 jobs added last month and unemployment below 4%.
- The economy continues to grow. The Atlanta Fed estimates GDP will expand at a healthy 2.5% clip this quarter.
- And the stock market (which the Fed says it doesn’t care that much about, but we all know it does), continues to rise. It’s up 9% so far this year.
That first bullet point suggests that interest rates need to remain high to push inflation lower. The other three bullets suggest there is no need to lower rates to stimulate the economy.
So there you have it. The Fed is likely to hike rates only a couple times this year, at most… and maybe not at all.
As a result, investors don’t need worry about fighting (or not fighting) the Fed this year.
Instead (as Alexander Green always advises) investors should base their investment decisions on the fundamentals of individual companies.
Well-run companies with earnings, revenue momentum, and good products and services will thrive in the long term… no matter what the Fed is up to.