The Market Roars Back

Dec 22, 2023

If you were invested in the market since the beginning of November, you've made money. The Fed is currently holding interest rates steady, with the Fed Funds rate range between 5.25%-5.5%. But that isn't why markets have rallied of late. The Fed is forecasting 3 rate cuts in 2024. Markets soared on the news. Why? In part it’s because at the last FOMC meeting the Fed signaled that rate increases were done. This is what we’ve been saying for months at CameronDowning. In other words, rates have peaked. In addition, the market rose strongly because it doesn’t believe Fed Chair Jerome Powell when he says 3 rate cuts are expected in 2024. Investors anticipate more rate cuts than this. In fact current consensus among investors is at least six 0.25 point interest rate cuts in 2024 (CME FedWatch Tool - CME Group).

(Photo credit: Photo by Mathieu Stern on Unsplash)

There is more good news. Most publicly-traded companies earned more than expected this quarter and they are forecasting a more optimistic earnings outlook heading into next year. For nearly a year we were in what Wall Street analysts have termed an “earnings recession”. Until the fourth quarter of 2023, company earnings have been lackluster compared to market norms for some time.  That has changed as, broadly speaking, companies are now expressing a renewed optimism heading into 2024 (The Earnings Recession Is Over | Kiplinger).

From the Wall Street Journal: The Federal Reserve is winning its fight over inflation, boosting Americans’ spirits and offering greater reassurance that the U.S. economy can avoid a recession while bringing prices under control. The Fed’s preferred inflation measure, the personal-consumption expenditures price index, fell 0.1% in November from the previous month, the first decline since April 2020, the Commerce Department said Friday. Prices were up 2.6% on the year, not far from the Fed’s 2% (inflation) target … Many economists now say the economy will likely cruise to a so-called soft landing in which inflation returns to the Fed’s target without a recession (WSJ: Prices Fell in November for the First Time Since 2020. Inflation is Approaching Fed Target).

The Fed lowering rates in 2024 is an indication that they believe they have accomplished what it set out to do -- combat inflation in the economy. No one wants inflation, of course. But interest rates that are held higher for longer can also be harmful for economic growth and would have a detrimental effect on the true engine of the economy – the American consumer. More specifically, the Fed is re-focusing on the other pillar of its dual mandate – maintaining maximum stable employment. The U.S. unemployment rate is still historically strong – sitting at 3.7% nationally – and now the idea is to start getting out of the way and give the economy some breathing room. We’re not going back to 0% interest rates anytime soon, but all signs point to a less restrictive monetary policy going forward (Associated Press)

What does this mean for you? Time in the market is better than timing the market.

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