Our concern: In November 2023, Jerome Powell (Chairman of the Federal Reserve) announced that they plan on several rate cuts in 2024. Some investment firms and analysts interpreted this (and the dot plan) to mean there could be as many as 6 rate cuts throughout 2024, starting as early as March 2024.
Back then, you will recall that the stock market took off given the forecast that the Fed would loosen monetary policy and that inflation would revert to the Fed’s stated objective of 2.0%. We thought otherwise and have gone on the record that we did not see any rate cuts happening until midyear, at the earliest. We also thought that there might be only 2-3 cuts in 2024, not the 6 many people bought into late last year.
All through the fall and recently, we have stated “higher for longer”.
Also, last fall we showed the 10-year Treasury charts trending downward below 4.0%. We cautioned our subscribers that we might see the 10-year rate back above 4.0% given our belief that inflation could re-accelerate in 2024. Mish wrote several pieces that show what happened in the 70s and our belief that inflation will not come down so soon. Friday, the 10-year closed at a multi-month high of 4.4%. Real inflation as reported last month, is still running close to 3.0%, far from the Fed’s stated objective of 2.0%
Warning Sign: No rate cuts this year.
Thursday, US Federal Reserve Bank of Minneapolis President Neel Kashkari said interest rate cuts may not be needed this year. This was probably the last thing impatient investors wanted to hear. It’s good for savers, but bad for stock market investors.
He called the January and February inflation readings “a little bit concerning” and said he needs to see more progress on prices to gain confidence that they’re moving toward the Fed’s 2% target. “In March, I had jotted down two rate cuts this year if inflation continues to fall back towards our 2% target”, said Kashkari on Thursday. “If we continue to see inflation moving sideways, then that would make me question whether we needed to do those rate cuts at all.”
The market sold off, with the S&P down over 1.2%, the QQQ down over 1.5%, and small cap stocks, the least stretched of the indices, down about 1%. On Friday, a few other ex- and current Fed Governors gave their opinion (after the jobs report) that inflation was still trending down, and the market cheered that the prospect of interest rate cuts was still on the table.
There were comments in the news after the dust settled Friday from the jobs report issued on Friday. Here is one which we happen to agree with:
There’s ‘no way’ the Fed is cutting 3 times this year, says Craig Johnson
Piper Sandler managing director and chief market technician Craig Johnson reacts to Federal Reserve Chairman Powell’s remarks on rate cuts, oil prices and jobless claims.
More Warning Signs: Investor Sentiment and the Stock Market
If you are a regular reader of this weekly column, then you are well aware that in the past few weeks, we have published numerous historical charts showing that when the first three months are positive, the year is positive, and what occurs after 5 straight positive performance months. All good ammunition for staying long the markets.
If you did not have a chance to read last week’s Market Outlook or would like to review it again, please click here to do so.
You should also know that most of the MarketGauge indicators are currently showing “risk on”. This will be further elaborated in the Big View section and on Keith’s video that follows.
There are warning signs, however.
Here are 8 warning signs that the market may move sideways or correct in the next few quarters.
1.) The % of consumers expecting higher stock prices is at 49.3% per the Conference Board. That number has only ever been higher once in January 2018 at 51%. Following that instance, the SPY generated negative returns over the next 1, 3, 6, 9, and 12 months. See chart below:
