Three Not Four in '24

What Happened: Fed leaves rates unchanged, confirms 3 cuts for 2024

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What Does it Mean? Despite stronger than anticipated inflation data of late, Jerome Powell confirmed their intentions to cut rates this year. Market participants cheered on the news bidding stocks up as gains were led by more interest rate sensitive areas such as small caps and gold.?

Why Do We Care??While you may become sick of us repeating our theme for the foreseeable future it bears repeating that we continue to find value in areas that are traditionally more interest rate sensitive than others. Small capitalized companies often must use loans to finance operations and when interest rates increase, this additional interest expense can be a significant headwind for profits. In our opinion this is precisely why the Small Cap Index remains more than 20% off highs, while other big cap areas such as the S&P and NASDAQ have already surpassed highs.?

Gold or Emerging Markets on the other hand have more to do with the US Dollar value than interest rates. When the Fed eases interest rates they do this by introducing additional money supply into the system which serves to reduce the value of our currency. When our currency value declines, investors often flock to areas that protect purchasing power, hence the continued strength of precious metals.?

While we still feel markets are long overdue for a pullback, we continue to remain bullish in these areas and feel the Fed actions will simply add more fuel to the bullish fire.?

What Happened: Bank of Japan ends historic negative interest rates and abandons yield curve control.

What Does it Mean??For years now the only major world economy not raising rates at a feverish pace has been Japan. In fact, while the rest of the developed world has moved rates to historic levels, until recently the Bank of Japan had set overnight rates at -.01% which basically means you paid to keep your money in a bank or at minimum definitely got no return. Despite increasing inflation, post Covid, the Bank of Japan took a different approach than other nations which has helped to fuel a stock market rally in the country that hasn’t been seen in decades. Now that easy monetary policy may be coming to an end.?

Why Do We Care??Many believe that over the years one of the drivers of US Stocks has been what is known as the “Yen Carry Trade.” In simple terms this means that institutions can borrow at extremely low rates in Japan and convert that money to other currencies thus investing in risk assets for an even greater rate of return. It’s unknown how much money is actually in play here but it will be worth keeping an eye on as we continue into this year and beyond. While the initial move on the news was a stronger Yen against the dollar, it faded very quickly as traders did not give the Bank of Japan any credit for their newfound fiscal responsibility. If in fact the Yen were to appreciate considerably it may send ripples through all of the global financial markets.?

Until next time

~ Quint

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