Dow Jones Industrial 33,670.29+0.79%, S&P 500 4,327.78+0.45%
Nasdaq Composite 13,407.23-0.19%, US Ten Year 4.62%, Crude Oil $87.66
September certainly lived up to its reputation as the worst month for stocks, and October has not yet reversed the trend. There are plenty of factors putting downward pressure on stocks, despite good earnings reports from some big names like United Healthcare, JP Morgan, PepsiCo, and Wells Fargo. Curiously geopolitical risks like the continued fighting between Ukraine and Russia and the sudden outbreak of hostilities between Hamas and Israel did not prevent stocks from rallying early in the week. Nor did intra-party squabbles in the Republican-controlled House and the expanding strike by the United Autoworkers. But stocks did sell off on Thursday and Friday. No surprise, interest rates continue to take center stage, with the Federal Reserve indicating that rates will be “higher for longer.”
How do they make this determination? Some of you may have read or heard about the Federal Open Market Committee’s “dot plots.” The dot plot summarizes projections by Federal Reserve members of where interest rates will be in the future. It is updated quarterly. At present the latest dot plot suggests a year-end rate for 2024 of 5.1%. This is higher than the June projection of 4.6%. Similarly, the 2025 year-end rate was revised upward from 3.4% to 3.9%. Hence the “higher for longer” expectation.
The latest projections are below. They suggest one more Fed Funds rate increase this year, and a less aggressive rate of decreases next year. The longer-run projection was unchanged at 2.5%.
For stocks the issue is how the Fed Funds rates affect them. Under “normal” economic conditions of a growing economy with modest inflation, lower rates mean higher stock prices. Outside of economic conditions such as a recession (shown in gray) that has been the case.
That has not yet become the prevailing opinion. Instead, there has been a renewed emphasis on short-term fixed income securities. The two-year treasury is now paying over 5%, so it makes sense to extend maturities out that far. Note that the yield curve is still inverted, with short rates higher than longer. Some analysts believe that as short rates fall, and the curve returns to a positive slope that longer maturity bonds will rally as rates decline along the entire range. Given the current federal debt of $33 trillion that may be a risky move.
Have a Great Week