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Fed cuts rate six times for 150 basis point

February 05, 2024

Assumption 1:

Fed cuts rate six times for 150 basis points (1.5%) of easing and a year-end fed funds rate below 4.0%. Update: The chances of a March rate cut have fallen but markets still fully expect a May rate cut (and maybe a March cut) and most importantly, investors still expect a year-end fed funds rate below 4.00%. And this hasn’t been forcefully contradicted by any Fed officials.

 

Assumption 2:

No Economic Slowdown. Update: Economic data is beginning to broadly show that the U.S. economy is losing forward momentum but it’s still not pointing to a slowdown. How do we know this is a market assumption? The market multiple. A market multiple is the number of times the market is trading times the earnings for the market. You don’t have to know the specifics of this number, just that the higher the multiple, the more overvalued the market. The higher the multiple, the more chance that the market could retreat. Currently that multiple is slightly overvalued.

Geopolitical situations have deteriorated since the start of the year as the U.S. is now actively striking Iranian proxy groups and trade through the Suez Canal has been disrupted. Meanwhile, there’s still no deal on Ukrainian aid and Russia is reportedly gearing up for an offensive in the coming months. But despite that, rising geopolitical risks are not yet high enough to spook stocks. How do we know this is a market assumption? Oil prices. Oil prices have risen since the start of the year but not to the point that it has negatively impacted stocks.

Update: Former President Trump will almost certainly win the Republican nomination and have that issue decided within the next few weeks. However, there’s been little-to-no resolution on his various criminal cases and those will unfold over the coming months. Despite this uncertainty and mild deterioration, it hasn’t impacted stocks and broadly markets still assume no negative political influence on stocks…yet!

Looking at inflation, the monthly increase was slightly larger than expected at 0.2% vs. (E) 0.1% but, more importantly, the year-over-year increase was slightly lower at 2.9% vs. (E) 3.0% and, most importantly, down from 3.2%. This is down from inflation of 9% a little over a year ago. So while it’s not yet at 2% (their target) this number will absolutely reinforce the expectation for a March or May rate cut.

Through last week, according to FactSet Research, we have seen 25 percent of the component companies in the S&P 500 post results for the fourth quarter of 2023. Of the companies that have reported results, 69 percent (seven percent higher than two weeks ago) have been surprised to the upside when looking at earnings while 68 percent (six percent higher than two weeks ago) have beaten revenue expectations. Through last week, the overall blended earnings growth rate for the S&P 500 was -1.4 percent (three percent better than two weeks ago).

 

As I said this past month, this years growth in stock is all about earnings. So far so good and why the markets are up for the year.