AE Wealth Management: Weekly Market Insights | 3/10/24 – 3/16/24

Weekly Market Commentary

THE WEEK IN REVIEW: March 10-16, 2024

Clouds gather for the Fed

Inflation data did not cooperate with the market’s expectations last week. People keep spending, energy costs are rising and prices keep going up. After a hotter-than-expected jobs report the previous week, markets regained their composure early in the week, choosing to focus on the unemployment rate going from 3.7% to 3.9% instead of the surprisingly high number of new jobs in February. Payrolls for December and January were significantly revised down, the unemployment rate increased and wage growth was weaker than forecasted.

The labor market continues to rebalance, but it’s rebalancing too slowly for the Federal Reserve. Then we received fresh data on Tuesday showing inflation just isn’t coming down. The markets began to swoon because the expected rate cut continues to be pushed further out because inflation remains stubbornly high for the Fed’s liking. We have hovered between 3.0% and 3.7% on the Consumer Price Index since June 2023. It’s beginning to look like a trend — and not one the Fed likes.

The longer inflation remains elevated and significantly above the Fed’s targeted 2% level, the longer rates will stay exactly where they are. June rate cuts will be pushed to July and September, and we will continue this data rubbernecking.

The question is, why is the market still at its current levels? It’s where it is due to the belief that we will get rate cuts in June or July and that the economy will experience a soft landing. But betting on one outcome when the likelihood of other outcomes is also plausible is probably not a smart strategy.

One of those other outcomes is the very real possibility that inflation has gone as low as it will go given the current efforts by the Fed and that additional hikes will be required to get us to 2% inflation. In other words, a 5.25% fed funds rate gets us 3% inflation, so if the Fed sticks to its goal of 2%, what rate gets us there — 5.5%? 6%? 6.5%? What does that do to the economy? This outcome has drawbacks: Inflation is sticky at 3%, and if the Fed raises rates instead of cutting them, it could drive us into a deep recession.

The other scenario is that the Fed redefines its benchmark for inflation. They make the decision that 2% has been used as the target for so long, it’s no longer relevant — so the Fed decides to “upgrade” its target inflation to 2.5-3.5% to reflect our more modern and complicated environment. If that happens, we could see sluggish economic growth. Rates will be cut here and there if we remain below the range, and we bob around each time data comes out.

Right now, markets are still holding on to the idea of the soft landing, no recession in 2024 and some Fed cuts this year. The chances of all this happening seem to be about 50/50, at best.

Time running out for TikTok

Congress finally got to business with respect to TikTok last week. It’s not clear what the House Energy and Commerce Committee heard behind closed doors, but it prompted a 50-0 vote to send a bill to the full House directing parent company ByteDance to sell the app or else have TikTok banned in the U.S. (It appears ByteDance didn’t get the memo that it’s helpful for a high profile and controversial business to cultivate friends in D.C.) Once in the House, the bill passed 352-65 and is now with the Senate. If it gets a majority there, President Joe Biden said he would sign it into law.

Coming this week

• The Fed is scheduled to meet Tuesday and Wednesday. This is the second meeting of 2024 and might be a more interesting meeting than was initially expected, given the recent data. After the last meeting blew up any expectations of a cut in March, inflation data has actually ticked up, along with oil prices. The language coming out of this week’s meeting might be a stiff wake-up call to the markets, which continue to bet on a soft landing and interest rate cuts. Watch and listen to what Fed Chair Jerome Powell has to say on Wednesday afternoon.
• Data released this week includes MBA mortgage applications on Wednesday and unemployment claims, leading economic indicators and existing home sales on Thursday.
• Fourth-quarter earnings are done, with 99% of S&P 500 companies reporting actual results. It wasn’t a bad quarter despite the gloomy predictions: 73% of companies reported a positive earnings-per-share surprise and 64% reported a positive revenue surprise.

Sources:
https://www.morningstar.com
https://www.cnbc.com
https://www.marketwatch.com
https://markets.businessinsider.com
https://ycharts.com

Accessed 03/15/2024

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