March Madness?

Weekly Newsletter: February 5, 2024

March Madness is upon us. The Super Bowl is yet to kick off, but all the talk is about March. Not the NCAA tournament, but whether the Fed will, should, or could, cut interest rates at their next meeting. Listening to Chair Powell at his press conference, there was much discussion about waiting for more information and not really signing off on rate cuts all that soon. However much of the discussion by strategists was that rates should still be cut due to the lower rates of inflation. Much of that talk was dashed on Friday with the release of a huge jump in newly created jobs, twice the estimates. This week begins the Fed governors chatting about rates, inflation, and potential cuts. Expect the markets to get pulled in a variety of directions based on their comments. There is not likely to be much consensus either between various governors. It might be better for them to comment on college basketball rather than the economy!

The highlight of the week was the Fed meeting, but there was little in the way of enlightening comments from Chair Powell. Reading the soggy tea leaves, the Fed is uncomfortable in cutting rates with the economy chugging along at 2.5-3% while inflation remains above their target. Their concern (rightly so) is that cutting rates soon could goose the economy and inflation would never get to the 2% target. The much-discussed economic soft landing becomes a fly-by. Others worry that rates remain well above the rate of inflation and will eventually have big negative impacts on economic growth. This is the soft landing that becomes a hard landing. To use another analogy, the Fed is being asked to maneuver the Monaco raceway in a minivan rather than a Formula One car. The US economy is not that nimble, and tweaks/changes take time to have an impact. ?

Bond yields dropped following the Fed meeting, as investors expect that rates will eventually fall, so it makes sense to lock in yields today. Following the employment report, however, yields rose dramatically, as investors now expect the Fed to stay higher for longer. Who said guessing the direction of interest rates was going to be easy?! Short-term yields remain higher than long-term yields. Commodity prices have struggled, keeping inflation relatively low for manufactured goods. Services remain in high demand and prices have yet to moderate in this portion of the economy. Outside of Fed chatter, there will be little “important” economic data that would move bond prices.

Earnings were released on the largest US companies and the results were mixed. Overall, the boost from Meta and Amazon pushed the averages higher, even as more stocks (again) fell than rose on the week. Just how big are the top 10 companies in the SP500? Their combined value would be the third wealthiest country and have a higher GDP than Japan. Investors have to question just how long they can remain king of a very large hill and what may be coming down the road. For now, investors are very willing to “just buy” these huge companies, without much thought about how they can or will grow in the future.

The focus this week will be on the various Fed governors chatting about the economy, likely cuts in interest rates, and their view on inflation. They may have voted unanimously on keeping rates unchanged last week, but their views are very divergent and could roil the markets, especially bonds.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.