Indiana Trust Wealth Management
Investment Advisory Services

by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 3% for the week.
  • US stocks continue to shrug off the decreasing odds of Federal Reserve interest rate cuts in 2024.

The most surprising development in capital markets in 2024 (so far) is that equities have held up despite the evaporation of expectations for the Federal Reserve to lower its target interest rate this year. Back in January, markets expected six or more rate cuts from the Fed. Now, markets anticipate one cut, maybe, by year end:

Source: Matt Turner, Bloomberg, April 24, 2024

The Fed’s preferred inflation gauge, the PCE index, unexpectedly ticked higher in each of the first three months of 2024. On the other side of the Fed’s dual mandate, job creation has been positive for 39 consecutive months and unemployment is at a rather low 3.8%. This mosaic of data has led investors to conclude that the Fed may not be in such a hurry to cut rates after all.

Higher interest rates for longer should, in theory, curtail economic activity, primarily through housing but also through consumer credit and a variety of other channels. This is why, in 2022, most economists were predicting a severe recession. Bloomberg’s economics team famously placed a 100% probability of a recession in 2023.

Somewhat embarrassingly for the economics profession, those predictions did not come to pass. Higher interest rates have not slowed things down. A raft of economic data this week reflects a US economy that is chugging along. Personal spending and final sales to domestic purchasers came in strong for the first quarter, and real personal income came in at an all-time high in March.

The US stock market has held up through these developments, likely because they reflect a high “nominal” growth environment. There is much focus on “real” economic growth, which strips away inflation, because that reflects underlying real economic activity. However, corporate profits are measured in nominal dollars and not real (inflation adjusted) dollars.  Real economic growth has been solid, and inflation remains somewhat elevated, resulting in a high nominal growth environment. Strong nominal profit growth, combined with other macroeconomic factors, is helping to provide a nice tailwind for US stocks.

Perhaps the inflation numbers also explain why equities have been decent. Core PCE rose 0.3% in March and is up 2.8% year-over-year, which project to be higher than the Fed’s 2% target – but perhaps are not sufficiently high for investors to be worried about the Fed raising interest rates from its current target range of 5% to 5.25%.

The specter of the Fed hiking interest rates is floating somewhere outside the current consciousness of capital markets. For that to become an increasing concern, inflation would need to show signs of meaningful reacceleration.


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