The drive higher in rates will always inject some turbulence into the US equity market.
Stocks down with US yields and the dollar both up mean only one thing: the market universally reads the FOMC statement through a more hawkish lens. Indeed, 12 members saw a reason for another rate hike this year, while 7 did not. Additionally, only 2 rate cuts are embedded in member projections for 2024, down from 4 in the last meeting. The long-term median dot, a proxy for the Fed's view of where the "neutral" rate falls, remained at 2.5%.
The critical question is where interest rates will ultimately settle once the Fed concludes its hiking cycle. And whether the US economy avoids a recession is a significant consideration for both stock and bond investors. However, based on their projections of sharply higher GDP growth, a lower unemployment rate, and lower core inflation, The Federal Reserve ( Fed) is more self-assured that it can achieve a soft landing and that the economy can sustain higher rates for a longer period. Even if the Fed doesn't hike, they will likely be in no rush to cut rates.
The narrative has shifted back to the most precarious dynamic for stock market operators as interest rates are making fresh highs, which reflexively impinges on the stock markets. The volatility of this correlation defines a more complicated trading environment as the drive higher in rates will always inject some turbulence into the US equity market.
So, instead of assuming that the Fed will soon start cutting rates after the current hiking cycle, and given the latest Fed guidance, with only 2 rate cuts embedded in members' 2024 projections, it might be more appropriate for investors to look at the pre-GFC (Global Financial Crisis) era when rates were relatively higher under higher-for-longer-rate policy regimes. This historical context of "higher for longer" could impede areas of the stock market's performance in the coming months.
Ultimately, the song remains the same, and the inflation path is a crucial variable on what might drive the Fed (and other central banks) policy in the months and years ahead.
For sentiment to quickly recover, investors may need confirmation that the economy, hence stocks, can handle the current policy rate levels without significant economic harm. In the near term, there is a possibility of the opposite happening. Growth might soften in the fourth quarter due to factors such as the resumption of student loan repayments, the UAW strike, and a potential federal government shutdown, which could temporarily weigh on Q4 US growth.
How temporary this could be or whether these events tip the economic scales to recession could be the roller coaster ride from here to Christmas.
SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.
Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.
Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.