Stocks remain elevated with every dip being shallow and short lived. Investors just don’t want their money on the sidelines if and when the Fed flashes the green light that rates are about to be cut. This keeps stocks pinned just under 5,200 for the S&P 500 (SPY).
This has all eyes focused on the Wednesday 3/20 Fed announcement. Not so much the press release that comes out at 2pm ET as we all know there is no rate hike forthcoming this time around. The real keys lie in the 2:30pm press conference by Powell as well as the release of their Summary of Economic projections.
Investors will be looking for any hint, whisper or facial tic that foretells what happens next for rates, and by extension, the stock market. So, let’s review the clues we have in hand at this moment to make the most sense out of the events on 3/20.
Market Commentary
At the last Fed meeting in January Chairman Powell said that rate cuts starting in March was highly unlikely. So, investors started to recalibrate with May being the hopeful starting date. But the closer we get to that event, with inflation reports being a tad hotter than expected, May is looking far too soon.
Now June is the epicenter of the debate with the CME calculating a 59% probability of the first rate cut coming based on investor actions. Note that this is down from nearly 99% expectation to start the year. Meaning this the start date of the first rate cut is a very fluid concept that keeps sliding further into the future.
In the good news department, the economy is growing, but at a more modest pace. The Q1 estimate from GDPNow is calling for +2.1% economic growth. This is actually better news than earlier in the month when things were looking north of 3%. Because that above trend growth comes with it a bit too much inflationary pressure.
What we want to see as investors is about 1-2% GDP at this moment. That would say we are safely above recessionary territory. But growing modestly enough to allow inflation to come back down to size making it easier for the Fed to start cutting rates.
In the bad news department both the most recent CPI and PPI reports were above expectations with not so welcome pops in the month over month readings. Plus, we find that sticky inflation (wages and housing) remains far too sticky.
Yes, inflation has been trending lower, but not close enough to the Fed’s 2% target. Add to it the 4.4% sticky inflation reading and I don’t believe there is enough time, nor enough good data, that can roll in the next couple months to lead to the first rate cut in June.
Anything is possible. And the Fed has private models that are a lot more finely tuned than those available to the general public like CPI and PPI. So again, it says that we all need to focus on Chairman Powells statements at Wednesday’s press conference. Plus, the clues that often lie in the quarterly release of their Summary of Economic Projections.
Most important of which will be an update of the dot plot showing the likely start date and pace of rate cuts expected by Fed members. The previous release in December thrilled investors with the idea of 3 rate cuts coming in 2024. Still quite possible. Unfortunately, the odds are slipping on that front.
This is not a statement for investors to get bearish. Quite the contrary. Signs still point bullish knowing that at some point the Fed will lower rates, which is a prime catalyst to improve the economy, corporate earnings, and yes, stock prices.
Just a question of how much further stocks can advance before those rate cuts arrive. Gladly in the meantime I am seeing the market better reward stocks that offer better value and not just clinging to the Magnificent 7.
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SPY shares were trading at $515.71 per share on Tuesday afternoon, up $2.85 (+0.56%). Year-to-date, SPY has gained 8.50%, versus a % rise in the benchmark S&P 500 index during the same period.
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