With the US Federal Reserve signaling imminent interest rate cuts, investors are shifting their focus to upcoming economic data, questioning whether the "soft landing" narrative that has buoyed U.S. stocks in 2024 can endure.
Federal Reserve Chair Jerome Powell's recent statement at the annual conference in Jackson Hole, Wyoming, marked a significant shift. He announced that the "time has come" to begin lowering interest rates, a more dovish stance than many expected. The process is likely to start next month with a 25 basis-point cut during the Fed's monetary policy meeting on September 17-18.
While this announcement has led to market optimism, it also raises concerns. With the S&P 500 up 18% this year and equity valuations remaining high, investors are now closely monitoring whether the economy can sustain growth while inflation cools. This balance is crucial for continued market stability.
"What the market wanted was to hear that the rate-cutting cycle is starting," said Alessio de Longis, senior portfolio manager and head of investments at Invesco Solutions. However, he cautioned, "Is the Fed telling us that they're actually worried about the economy now? And if that is the case, maybe the excitement about the cutting cycle should take a different perspective."
Historical data suggests that stocks perform better when rate cuts occur alongside resilient economic growth rather than during a sharp slowdown. Since 1970, the S&P 500 has risen an average of 18% one year after the first rate cut in non-recessionary periods, compared to just 2% during recessionary periods, according to Evercore ISI strategists.
Following Powell's comments, U.S. stocks rallied on Friday, but investors remain vigilant. Upcoming data, including the personal consumption expenditures price index on August 30 and the consumer price index on September 11, will be critical in shaping market expectations. Signs of economic weakness could lead to a more significant rate cut of 50 basis points, with market expectations for such a move rising from 29% to 35% after Powell's speech.
Rick Rieder, BlackRock’s chief investment officer of global fixed income, highlighted the Fed's potential flexibility, noting that it could ease substantially in response to any acute economic weakness.
Market participants are also weighing whether the rate cuts are driven by moderating inflation or a weakening labor market. Quincy Krosby, chief global strategist at LPL Financial, emphasized, "The market wants a rate-cutting cycle introduced because inflation is coming down. The question remains as to whether or not we see more deterioration in the labor market."
September, historically the weakest month for stock performance, could bring volatility, especially with the S&P 500's elevated forward price-to-earnings ratio of 21, compared to its long-term average of 15.7. The tight presidential race between Vice President Kamala Harris and former President Donald Trump adds another layer of uncertainty.
"The longer-term trends in stocks are rock-solid, and any weakness is an opportunity to add exposure," said Andre Bakhos, managing member at Ingenium Analytics LLC. However, he warned that in the short term, "we're going to get choppy, erratic, volatile moves because no one really knows what happens now that Powell has shown his hand."
(Source:www.cuinsight.com)
Federal Reserve Chair Jerome Powell's recent statement at the annual conference in Jackson Hole, Wyoming, marked a significant shift. He announced that the "time has come" to begin lowering interest rates, a more dovish stance than many expected. The process is likely to start next month with a 25 basis-point cut during the Fed's monetary policy meeting on September 17-18.
While this announcement has led to market optimism, it also raises concerns. With the S&P 500 up 18% this year and equity valuations remaining high, investors are now closely monitoring whether the economy can sustain growth while inflation cools. This balance is crucial for continued market stability.
"What the market wanted was to hear that the rate-cutting cycle is starting," said Alessio de Longis, senior portfolio manager and head of investments at Invesco Solutions. However, he cautioned, "Is the Fed telling us that they're actually worried about the economy now? And if that is the case, maybe the excitement about the cutting cycle should take a different perspective."
Historical data suggests that stocks perform better when rate cuts occur alongside resilient economic growth rather than during a sharp slowdown. Since 1970, the S&P 500 has risen an average of 18% one year after the first rate cut in non-recessionary periods, compared to just 2% during recessionary periods, according to Evercore ISI strategists.
Following Powell's comments, U.S. stocks rallied on Friday, but investors remain vigilant. Upcoming data, including the personal consumption expenditures price index on August 30 and the consumer price index on September 11, will be critical in shaping market expectations. Signs of economic weakness could lead to a more significant rate cut of 50 basis points, with market expectations for such a move rising from 29% to 35% after Powell's speech.
Rick Rieder, BlackRock’s chief investment officer of global fixed income, highlighted the Fed's potential flexibility, noting that it could ease substantially in response to any acute economic weakness.
Market participants are also weighing whether the rate cuts are driven by moderating inflation or a weakening labor market. Quincy Krosby, chief global strategist at LPL Financial, emphasized, "The market wants a rate-cutting cycle introduced because inflation is coming down. The question remains as to whether or not we see more deterioration in the labor market."
September, historically the weakest month for stock performance, could bring volatility, especially with the S&P 500's elevated forward price-to-earnings ratio of 21, compared to its long-term average of 15.7. The tight presidential race between Vice President Kamala Harris and former President Donald Trump adds another layer of uncertainty.
"The longer-term trends in stocks are rock-solid, and any weakness is an opportunity to add exposure," said Andre Bakhos, managing member at Ingenium Analytics LLC. However, he warned that in the short term, "we're going to get choppy, erratic, volatile moves because no one really knows what happens now that Powell has shown his hand."
(Source:www.cuinsight.com)
