Source: Golden Ten Data
Powell “reset” expectations of the Federal Reserve's interest rate cut; why are investors ignoring it?
Investors were generally at ease with Federal Reserve Chairman Powell's hawkish remarks about interest rate prospects on Tuesday. This development may come as a surprise to some market observers. As Evercore ISI economists have described, Powell's “controlled reset” of the Federal Reserve's interest rate cut plan is likely to trigger more market volatility.
In contrast, investors remained generally calm. The S&P 500 closed above the daily low, and the Dow Jones Industrial Average ended six consecutive trading days of decline. Although the two-year US Treasury yield once surpassed 5% for the first time since November last year, it finally settled at a level of 4 basis points higher and lower than the previous day. The price of gold rose slightly.
Market strategists and fund managers interviewed by MarketWatch said that market resilience stems from two factors.
First, other senior Federal Reserve officials have said they are unwilling to cut interest rates in the absence of further signs of slowing inflation. This has already removed some of the surprises in Powell's remarks.
Market strategists pointed out that for more than a month, Federal Reserve officials have been voicing concerns about stagnant inflation. Earlier on Tuesday, Federal Reserve Vice Chairman Jefferson hinted that interest rates may remain at their highest level in more than 20 years until “continuing” inflation shows signs of further deceleration. San Francisco Federal Reserve Chairman Daly also made similar remarks. Daly said earlier this month that there is no urgency for the Federal Reserve to cut interest rates. Even Chicago Federal Reserve Chairman Goulsby expressed surprise at the stubborn rise in housing service prices. According to market strategists, Goulsby is one of the more moderate members of the Federal Reserve Interest Rate Committee.
Prior to Powell's confirmation, let other members of the Federal Reserve's interest rate setting committee explain the changes in the Fed's policy outlook. This followed a familiar strategy — the Federal Reserve used this strategy at the end of last year to show that it had completed raising interest rates.
Phil Kosmala, managing director of investment consulting firm Taiber Kosmala & Associates, said: “Powell's remarks today (Tuesday) are not too different from recent remarks made by other members of the Federal Open Market Committee (FOMC).”
The second reason the market didn't respond much on Tuesday was that data showed that the US economy continued to grow strongly in the first quarter. According to data released by the Atlanta Federal Reserve's GDPNow tracker on Tuesday, US GDP in the first quarter is expected to grow at an annual rate of 2.9%.
Savita Subramanian, a senior stock strategist at Bank of America Global Research (BofA Global Research), said that this bodes well for corporate profits. Corporate profits have replaced monetary policy and become the main driving force behind the 2024 stock market rise. Hopes that the Federal Reserve will cut interest rates drastically in 2024 triggered a widespread “everything rises” at the end of last year. Although some of the more speculative factors in this wave of gains have cooled down, the S&P 500 index is still up 22% from its closing low on October 27 last year. According to Dow Jones Market Data (Dow Jones Market Data), the general market index fell only 3.9% from the record high on March 28.
Many market observers had anticipated a correction in the US stock market. Kosmala pointed out that the decline so far in April had all the characteristics of regular consolidation. In all probability, the biggest threat to the stock market is not the Federal Reserve. Conversely, corporate profits are not growing fast enough to justify overvalued stocks; this is probably a greater risk.
Rob Haworth, senior investment strategist at U.S. Bank Asset Management (U.S. Bank Asset Management), said investors can no longer expect the Fed to cut interest rates to save the stock market. Instead, companies may need to meet earnings growth expectations set by Wall Street in order to maintain their gains. “Profitability remains the key to the market,” he said in an interview.
Kosmala believes that market disappointment is most likely to occur in the fourth quarter. According to FactSet's consensus, analysts expect profit growth of 17.7% and revenue growth of 5.8% for the fourth quarter of the S&P 500 index. Businesses may find it difficult to meet these expectations, even if the Federal Reserve has cut interest rates once or twice by then.
After all, according to James Abate, fund manager of Center American Select Equity Fund, since the beginning of the COVID-19 outbreak, with the exception of a few companies such as Nvidia, corporate profit margins have been declining. In an interview, Abate said, “If profit growth does not accelerate further, it will be difficult for profit margins to rise from now on.”
Kosmala said that the US stock market also faces other threats, the most obvious of which is the threat of escalating conflict between Israel and Iran.
Editor/jayden