What if the Fed Doesn’t Cut Rates in 2024?

IN THIS PUBLICATION:

• Equity markets are overbought, but it would be unusual if the positive sentiment generated in the last few months falters in the New Year.

• In 2024, we should remain in a ‘hit and run’ mode, because the various plausible but divergent narratives that peppered 2023 are still to be satisfied.

• We highlight our preferred strategies for 2024.

The Feel-Good Factor

Based on the December dot-plot, the Fed expects to cut rates by 75 basis points in 2024. The market has been pricing for double that amount by the end of next year. Bonds and equities have both rallied in anticipation of the pivot. All of which leads us to ask…

• Is the good news all priced in?

• If risk assets rally while unemployment remains low, will the Fed need to pivot at all?

It’s been a bonanza in global markets over the last few months.

• The Magnificent 7 Index, which tracks seven of the largest mega-cap tech names in the US, has made a new all-time high.

This time though, this has not been a narrow rally. As noted by Jason Goepfert (@sentimentrader): “The S&P500 equal-weight index has just cycled from a 52-week low to a 52-week high in 33 days. The only time since 1957 it happened faster was in September 1982 when the average stock went on to gain over 46% over the next year.”

The German DAX Index has also recently made a new all-time high, which is interesting because the German economy is supposed to still be reeling from a slowdown in its global export markets, and yet the DAX has gained 14% since the beginning of November.

The anticipation of the pivot has also helped US 10-year bonds shed over 100 basis points in yields since late October 2023, which in turn has put the dollar on the back foot against other major currencies such as the Euro and Japanese Yen.

Both a weaker US dollar and declining yields have helped ease financial conditions, which then supports risk assets.

Can Risk Assets Rise Further?

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