Hurry Up and Wait

Towards the end of 2023, many economists and market watchers were expecting that the Federal Reserve would cut interest rates 4-6 times in 2024.  The Fed itself even projected that 2-3 rate cuts were likely, but consistently maintained that any changes to interest rates would be data dependent.  Many expected that the first of the rate cuts would happen in May and would continue throughout the year.  Well, it is almost May, and it is safe to say that a rate cut does not appear to be imminent. 

Not to say that this is a bad thing for the economy.  The labor market is strong.  Fixed income instruments like CDs, bonds and treasuries are paying nice yields that have had a positive impact on savings accounts.  Investors do not have to rely solely on stocks and other more risky sectors in order to see growth in their portfolios.  We are currently in a fairly normal yield environment, historically speaking.
Inflation is higher than the Fed’s target, though.  According to the US Bureau of Labor Statistics, March 2023-2024 saw the Consumer Price Index rise by 3.5%.  The Fed’s target CPI is 2%.  CPI is almost two times higher than the target.  Does that indicate that the Fed may increase interest rates, rather than cut them?  We don’t think that is likely.  Conventional wisdom says that interest rates take 18-24 months to work their way through the system.  The Fed started raising interest rates in March 2022 and the final increase was in July of 2023.  It could be that we just need to hurry up and wait for the series of rate increases to have their full impact.

We will not be waiting in a vacuum, however.  The global geopolitical climate is very volatile.  There is still a war in Ukraine and extreme conflict in Palestine.  The whole Middle East is on edge, with Iran and Israel engaged in a limited, but clearly open, exchange of hostilities – including sending drones and missiles at each other.  The political climate in the US is mild by comparison, but this will be a contentious presidential election cycle.  Depending on your party leanings, you may think that Congress has become incapable of legislating and that both the Supreme Court and the Justice Department have been weaponized to achieve political goals.  A former President is in criminal court.  The situation at the southern border is a nightmare.  Emotions run high.  Compromise seems difficult.

From a market perspective, the S&P 500 Index and the Dow Jones Index both hit all-time highs this past quarter.  Oddly, so did the price of gold.  The ‘Magnificent Seven’ (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta and Tesla) are responsible for approximately 37% of the S&P 500’s gain in the first quarter.  It is clear that the rally has been driven largely by tech stocks, both home and abroad.  Artificial intelligence, semi-conductor chips and social media apps – some of these are companies that weren’t even around 20 years ago!   

This is likely to be an interesting year in the markets.  Things can change quickly, to the upside or the downside.  We wait to see what data points might push the Fed in one direction or the other.  We watch a world embroiled in conflict.  We are once again relying on maintaining well-diversified portfolios to help mitigate some of the risk, while still positioning an investor for growth in certain sectors.

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