Fed's Early Pivot Signals Minimal 2024 Cuts, S&P 500 Grows

Key Takeaway

• Fed's pivot to a less restrictive policy began earlier than perceived, with markets now pricing minimal rate cuts for 2024.
• Employment and inflation data suggest no immediate rate cuts; swaps market expects at most one or two by year-end.
• Potential for profit in a "no-landing" US economy, with capped bond yields and growth opportunities for S&P 500 companies.

Fed's Pivot and Market Dynamics

The Federal Reserve's policy pivot, initially perceived during the post-FOMC press conference in December 2023, was actually signaled earlier, with market dynamics adjusting accordingly. Despite the anticipation of rate cuts, the current economic data, including stable employment figures and a 3.7% increase in core personal consumption expenditures in 1Q 2024, suggest that conditions do not warrant immediate rate reductions. This scenario has led to a recalibration of expectations, with swaps markets now pricing in at most one or two cuts by year-end, a significant shift from the more aggressive rate cut expectations seen in late 2023.

Economic Resilience Fuels Optimism

Despite the adjustment in rate cut expectations, the US economy's resilience, marked by robust growth and stable employment, continues to fuel optimism for both stocks and bonds. The notion of a "no-landing" economy, coupled with the Fed's easing bias, suggests a capped upside for long-term bond yields and a supportive environment for equities. This economic backdrop, alongside signs of global economic recovery and strong corporate earnings, provides a solid foundation for a 60-40 portfolio performance in 2024.

Equity Markets and Global Growth

The S&P 500's recent approach to record levels, despite pared-back rate cut expectations, underscores the influence of global economic growth on equity markets. Drawing parallels with the 1990s, when equities thrived amidst high-interest rates due to strong economic growth, current market dynamics suggest a similar trajectory. With about 81% of US companies outperforming earnings expectations in a high-rate environment, the underlying economic strength appears to sustain equity gains, further supported by secular themes such as technology deflation and healthcare innovation.