Financial Forum - April 2024

Market Commentary – Stocks Continue to March Higher

4^th Quarter 2023

Inflation easing.

Investors hoping the Fed cuts rates in March 2024.

The economy is still strong and growing.

Mega-cap stocks are the place to be.

Artificial Intelligence (A.I.) is all the rage.

Markets priced for perfection.

1^st Quarter 2024

Repeat the above narrative.

Markets started 2024 with the same focus they had last year with the Fed and their battle against inflation taking center stage.  At their latest confab (Federal Reserve, 2024), the central bank kept its fed funds rate unchanged for the fifth consecutive meeting and forecast that they would have three quarter-point rate cuts by the end of the year.  In other words, the higher-for-longer rate regime will continue as inflation has remained well above the Fed’s two percent target.  The Fed maintained its projection that the medium federal funds rate would hit 4.6% by the end of the year and that the first rate cut will probably occur in June.  The central bank also increased its 2024 GDP estimate to 2.1%, up from December’s 1.4% forecast. 

What Does the Fed’s Decision Mean for Markets?

The Fed provided investors with a “Dovish Upgrade” as it raised its forecast for U.S. growth and inflation, but also left the outlook for three rate cuts in place for 2024.  This dovish upgrade left some economists and investors perplexed as faster growth and inflation tend to lead to rate increases, rather than rate cuts.  After all, it’s difficult to cut rates when:

• You are in the midst of the largest expansion of fiscal policy (being funded by huge deficit spending)
• A highly valued stock market priced for perfection
• Wild investor speculation (i.e., Cryptocurrency and A.I.)
• Housing prices at record highs (despite highest mortgage rates in decades)
• Rising commodity prices
• Strong employment data
• Rising core inflation expectations (per Fed’s meeting 2.6% vs. 2.4%), and
• Rising GDP estimates (again, per the Fed)

Beneath the surface, the key takeaway from this meeting is that the major focus of investors should be on GROWTH and whether it can continue to hold up.  There were some small hints that Powell and the Fed may be a bit more worried about growth than the market currently expects, but at the end of the day, the market is not getting more than three rate cuts in 2024 unless growth rolls over, and at that point, it’s too late.  Higher-for-longer rates will continue to function as a headwind on growth.  So, with Fed policy known, and major relief on rates not coming in 2024, we must focus on growth and make sure we see, as early as possible, any evidence of growth rolling over; if that happens, it could be a major headache for this market.

Bottom Line:  Investors are already wondering how three rate cuts in the next eight months are still warranted if growth is seen firming and inflation is going to be higher than previously thought.  It presents a dilemma between theory and practice and underscores that the Fed is “stuck between a rock and a hard place,” as there are two major policy risks in play.  If the Fed cuts too early, they risk reigniting inflation.  If the Fed keeps rates high for too long, they risk sending the economy into a recession.  At the moment, markets are still pricing in a soft landing.  However, we need to stay keenly aware of the two aforementioned policy risks, as they are both major threats to the long-term outlook for the rally in stocks.

 

Wealth Management – The Stress of Debt

From time to time, we have written about the dangers of too much debt, especially debt for nonproductive purposes.  In simplest terms, debt pulls ahead sales as consumers buy goods today with money they don’t have.  This, in turn, means that they now have to spend their money paying back banks rather than making new purchases that would drive growth.  Paying off high interest rate loans also can be a major cause of stress.  Financial journalists are starting to take notice. 

According to Bloomberg News (Ballentine & Ronalds-Hannon, 2024), after years of managing household budgets through the worst inflation in a generation, U.S. families are increasingly pressured by a different kind of financial squeeze: The cost of carrying debt.

Two years after the Federal Reserve began hiking interest rates to tame prices, delinquency rates on credit cards and auto loans are the highest in more than a decade.  For the first time on record, interest payments on those and other non-mortgage debts are as big a financial burden for households as mortgage interest payments.

The figures suggest a difficult reality for the millions of consumers who are the engine of the U.S. economy. The era of high borrowing costs — however necessary to slow price increases — has a sting of its own that many families may feel for years to come, especially the ones that haven’t locked in cheap home loans.  And, as we stated above, barring a financial shock, the Fed is only planning on three small rate cuts in 2024.

As monthly debt payments require more of workers’ paychecks, those consumers are more exposed to potential economic contractions.

Interestingly, the cost of money also affects peoples’ perception of their own prosperity.  A February paper from IMF and Harvard University researchers suggests that the recent high cost of borrowing — which isn’t captured in inflation figures — is key to understanding why consumer sentiment remains lackluster, even as inflation has moderated and businesses are hiring at a healthy pace.

Quarterly thought…Happy Spring

"Spring is nature's way of saying, 'Let's party!”

…Robin Williams

Or as I like to say, “Let’s get this party started!”

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