3 Key Factors Driving the Magnificent Stock Rally

We hope you had a great week and are guessing it involved watching Jay Powell give his press conference following the January FOMC meeting.

Even though Powell pretty much ruled out a cut in March when he took the podium and stocks didn't react well to the idea that easing might not happen as soon as some had forecasted, markets still seem to be hopeful for a dovish pivot this year.

PIMCO Economist Tiffany W. highlights “markets already pricing a substantial cutting cycle” as one of PIMCO's four economic themes to know in 2024, along with the following:

- Global divergence in monetary policy

- Peak inflation and rising unemployment consistent with rate cuts

- Soft landings are possible, but risks remain

Sarah Ponczek, CFP?, CIMA? , with The BV Group of 瑞银集团 Private Wealth Management also weighs in on how the Fed has been driving market returns in part. She told Asset TV recently that when you dissect the “magnificent rally” that has sent stocks to new record highs, it comes down to three key factors:

“1. We continue to see technology companies rally, 2. economic data continues to come in strong and it continues to look like a soft landing is actually really plausible, and 3. there are expectations that the Federal Reserve is going to cut rates in 2024,” said Ponczek.

Finally, ClearBridge Investments ' Jeff Schulze, CFA , weighed in on the direction of the Fed in a recent Asset TV Masterclass and why those calling for six rate cuts this year could be getting ahead of their skis:

“Well, the Fed is in a very different place than it was six months ago, right? If you look at core PCE, which is the Fed's preferred measure of inflation, over the last six months, it's come in at an annualized basis of 1.9%, which actually is below target, so the Fed finally has the flexibility to not only focus on price stability, but also the full employment side of its dual mandate.

“So the Fed certainly is in the position for cutting, which is why the markets are pricing in those cuts for this year. But I think six is not going to come to fruition. I think even in a soft-landing scenario, if inflation is moving down, as we talked about earlier, if the Fed doesn't do anything, the Fed's going to get more in restrictive territory, and they don't want to do that. So they may cut one, two, maybe three times in a soft-landing scenario. If the Fed actually has a recession to deal with, they may cut 2 or 300 basis points.

“So I think with six cuts, the markets are pricing in a soft landing with some slight recession risk. But at the end of the day, this is a very good sign for a soft landing. It materially increases the odds, and it's something certainly that I've cheered. But it doesn't preclude a recession, because the Fed had cut 100 basis points ahead of the 2007 start of the recession and 150 basis points before 1990s recession start. But this is certainly a good dynamic and it does increase the probabilities of a soft landing, all things considered.”