It was a solid week in the markets last week, which helped recover the losses from earlier this year. The consensus view among most investors is that we’re currently in a Goldilocks economy that is neither too hot nor too cold, with steady growth and falling inflation. The expectation is also for the Federal Reserve to sharply cut short-term interest rates soon, and last week that view was baked into market expectations even more according to the CME FedWatch Tool . Entering this week, the market is currently pricing a 70% chance of a rate cut by March, but more remarkably a near 100% chance that short-term rates drop by 1% or more by September 18th. There has indeed been a positive correlation between stock market movement and market expectations regarding what the Federal Reserve will do. Expectations of rate cuts has been supportive of stock market prices.
Some, however, wonder if these Fed expectations are too aggressive. For example, the December CPI (Consumer Price Index) negatively surprised to the upside last week, revealing a 3.4% headline inflation rate and 3.9% core (ex-food and energy) year-over-year rate. Indeed, these year-over-year numbers have not fallen in recent months. Given that these numbers remain well-above the Fed’s target of 2%, coupled with the over-all employment situation still close to its strongest levels in decades (though deteriorating of late), the markets could be vulnerable to the possibility that rate cuts won’t be as fast and as deep as expected. Then again, it is Presidential Election season, and that generally means fiscal and monetary policy will be favorable for the economy and markets. Indeed, a new tax deal is in the works, and that could mean the US economy could get another nice liquidity boost.
Last week was also notable for the introduction of Bitcoin ETFs and the retirement of two legendary football coaches, Bill Belichick and Nick Saban. Regarding the former, Bitcoin remains a love ‘em or hate ‘em asset class, but also a signal of risk-on or risk-off investor appetite. As for the latter, these two highly successful coaches displayed the traits that successful long-term investors and portfolios share: discipline, consistency, and resilience. Football fans will miss rooting for them, or against them, but I’m betting they won’t get too far away from the game.
This week will be full of headlines and data including Retail Sales, more corporate earnings, continued tensions in the Red Sea and of course the Presidential Election season has finally officially begun.
Add it all up...
Stay invested. Stay diversified. Stay disciplined.
The views expressed herein are exclusively those of Orion Portfolio Solutions, LLC d/b/a Brinker Capital Investments a registered investment advisor, and are not meant as investment advice and are subject to change.
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