How Badly Does the Bull Market Need Rate Cuts?
The latest inflation data in March’s consumer price index (CPI) report sent the stock market into a volatile trading session. The Labor Department reported that prices for all items rose 3.5% year-over-year in March, which was slightly higher than economist expectations and marked an acceleration from February’s 3.2% print. On a month-over-month basis, prices rose 0.4%, which was also 0.1% higher than the street was expecting.(1)
Stocks and bonds sold off, and traders immediately started dialing back bets for rate cuts in 2024. One month ago, markets were expecting about 100 basis points of cuts in 2024, with many expecting the first cut at the April 30 – May 1 meeting. After the CPI release, these expectations were slashed to 40 basis points for the year or slightly less than two moves.?
CPI (blue line) ran hotter than expected in March
Fed Chairman Jerome Powell seemed to cement the dimming expectations for rate cuts last week when in a moderated question-and-answer in Washington he stated that “the recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” adding that “given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.”
In non-Fed speak: there’s no hurry to cut rates.
As I’ve written before, many market participants and a large swath of financial media have adopted the narrative that the stock market’s fate is in the Fed’s hands. Since expectations for rate cuts have been a key driver of the equity market rally, the thinking goes, that taking them away means introducing a major headwind for stocks.
I don’t buy that.
For one, it’s clear in the current environment that the Fed believes policy is sufficiently restrictive, meaning there’s no expectation that interest rates will go any higher. The debate remains around when the Fed will ultimately cut, and by how much. Not whether or not they’ll ever take that action.
Second, it’s important to contextualize why the Fed is choosing to hold rates where they are. If it’s because economic growth is good and the labor market is strong—but inflation is just being a bit stubborn—then investors can read this as a largely positive backdrop for corporate earnings and stocks. From 1950 to 2022, when headline CPI was running at a 3% to 5% annual pace (which we are now with the 3.8% print), the S&P 500 averaged an +8.5% annual forward 12-month return. When CPI falls into the 2% to 3% range—which I still expect this year—the S&P 500’s forward 12-month return jumps to +13.8%.
I would also add that if the Fed feels the need to tick interest rates even higher because of what they see as too-strong economic growth, that would not turn me bearish. History tells us that rising interest rates do not necessarily have to mean falling stocks – in fact, the opposite has been true throughout history:
In my view, the risk is not that inflation remains somewhat sticky, prompting the Fed to cut only once or twice in 2024, or not at all. What would hurt markets is if inflation and inflation expectations start to drift higher and become un-anchored from their current 2.5% to 3.5% level, perhaps because of some unforeseen shock in geopolitics or the global economy. If the Fed is forced to go in the other direction—raising rates instead of cutting them because of a negative inflation surprise—we could see this impact risk assets adversely. In my view, this is a tail risk in 2024, not a prominent one.
Bottom Line for Investors
Take another look at the CPI chart above. The blue line illustrates sticky headline CPI, but the red line is the Fed’s preferred inflation measure, the headline PCE price index. Its latest reading (for February 2024) was 2.5% year-over-year, well within striking distance of the Fed’s 2% target. And, given the CPI and Producer Price Index (PPI) inputs that factor into PCE calculations, we expect the March 2024 headline PCE price index to come in at around 2.7% or 2.8%. No need to sound any alarm bells yet.
领英推荐
2 Fred Economic Data. April 10, 2024. https://fred.stlouisfed.org/series/CPIAUCSL#
3 Bloomberg. 2024. https://www.washingtonpost.com/business/stocks-dont-rise-or-fall-because-of-interest-rates/2022/01/25/25d23e7c-7dd7-11ec-8cc8-b696564ba796_story.html
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. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.?
The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index.? The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.
The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.
The S&P 500 Pure Value index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics by using a style-attractiveness-weighting scheme. An investor cannot directly invest in an index.? The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.