This year the US stock market started on a wavering note, but it picked back up quickly. Following the FOMC last December, investors found reassurance in the acknowledgment by Fed members that supply and labor conditions had achieved a better balance. The indication that the tightening cycle had concluded also marked a significant shift from their previous stance, though it wasn't entirely surprising to investors. Nevertheless, getting an affirmative nod from the people in charge is still a notable boost.
The euphoria was however overdone in our opinion because the market started pricing in 6 rate cuts (150 bps) for 2024 when the Fed is only looking at 3 (75 bps). The markets are way more dovish. It means a cut for almost every FOMC meeting starting March this year. This mismatch between what the market anticipates vs what the Fed currently has in plans has the potential to create some nasty market volatility. And, we did see some broad-based selling-offs and a rise in both the dollar and bond yields at the start of the month, albeit short-lived.
The US market's resilience so far was a surprise. Even a much stronger Q4 GDP number this time didn't dent investors' sentiment or raise fears that higher interest rates might linger around longer. A year ago, this would spooked investors and caused a selloff across the markets.
But there are weaknesses in this strength. The rally is not broad-based. What drove it was the large technology and communication names. If you look at other areas such as small caps, defensive sectors, or even consumer discretionary, they were mostly in the red.
Why did the sentiments change so dramatically?
Perhaps people are just looking for reasons they can find to enter into the market. The broad momentum from last year, upcoming presidential elections, if things go wrong Fed and government will bail you out mentality, and cooling inflation while the economy stays robust. All these seem to override the mismatch between the Fed and the market's expectations this year.
The results from the first FOMC this year will be known in 2 days. This round, overwhelming odds (97%) betted on the rates holding. We are not expecting any surprises on this one here. The one to watch on everyone's radar will be the March meeting where about half the markets think there will be a cut at this point. But having said that, we believe the Fed will try to temper the runaway expectations following their pivot last year amidst all the usual stuff they say. And depending on what they say and the tone of their language, we might see some adjustments.
Let's meet for breakfast in 2024!
As we step into 2024, we are organizing a breakfast session for those who want to learn more about the markets. In this session, we will share our thoughts about the interest rate outlook for 2024, and its impact on REITs, bond funds, and 60-40 portfolios!
17 February 2024 (Saturday)
10:00 am to 11:30 am
10 Collyer Quay
Ocean Financial Centre
Singapore 049315
If you are interested, RSVP using the button below! See you there!
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