Stocks are trading near record highs after Wall Street received long-awaited clarity on the path for inflation and interest rates. Can that last?
The stock market has been on a tear in 2024, driven higher by robust corporate earnings and the artificial intelligence boom. That rally has been challenged in recent months by a slew of hotter-than-expected inflation reports and economic data, which spurred concerns that the Federal Reserve would wait longer than expected to cut rates.
The S&P 500 and Nasdaq Composite indexes both clinched several record closes last week as cooler-than-expected May Consumer and Producer Price Index reports raised Wall Street's hopes that inflation is coming down again.
Still, the Fed held interest rates steady on Wednesday and signaled just one cut for this year, fewer than the three it previously projected. Traders expect the Fed to begin easing rates in September at the earliest, according to the CME FedWatch Tool.
If inflation is cooling down but the Fed is still expected to keep its key lending rate higher for longer, what does that mean for the stock market?
Before the Bell spoke with Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, to discuss.
This interview has been edited for length and clarity.
Before the Bell: What is your biggest takeaway from last week?
Jack Janasiewicz: The bottom line … is that there's a disinflationary impulse coming. I think [Fed Chair Jerome] Powell was right to sort of look at [hotter-than-expected] January, February, March inflation data as maybe a little bit of an anomaly or a pause but not a reversal of that trend that's going to continue to head to that 2% target. So, again, heading in the right direction, it may be slower than people would like. But we're going to 2%.
And then the other thing I would point to as well — the labor side of their mandate is becoming a little more focused. [The Fed] is one of the only central banks that has the dual mandate with price stability and full employment. It feels like the price stability side is coming into better focus. As the economy slows a little bit here, and you start to see the unemployment rate tick a little bit higher … the Fed [could start] to focus on making sure that the unemployment rate doesn't start to rise.
That could be the trigger for rate cuts. So we're not ruling out rate cuts by September. We could easily have a cut. The data will tell us that, but I think the big takeaway for us is [inflation] going in the right direction.
What is the implication for stocks?
This is sort of a Goldilocks scenario for stocks where we've got inflation trending lower, but it's still a little bit elevated above the target, which is going to be good for corporate profits, and the economy is still growing above trend. And even if we slow, keep in mind where we're starting from. You're starting from an above-trend growth rate. So if you slow maybe we slow to trend. That's a pretty good backdrop. That's good for corporate earnings. And that's, not surprisingly, why the market continues to hold up.
I wouldn't be shocked if we get a pullback, but the underlying economy is still pretty strong, and we're basically going to tell our clients that any pullback, you should be looking to add on. So if we get a 5% or 10% correction in equities over the next month or two, you should be putting money to work, not de-risking here, because the fundamentals are still very strong for the economy.
Do you expect some of the cash that's on the sidelines to enter the stock market?
Some of that will come back in, but I don't think you're going to see all of it, only because you're still earning a pretty good yield on money market accounts. People have cash as cash, and it's kind of its own bucket. So swapping that bucket for an equity risk, it's not quite the same.
But I think some of that will find its way back into the markets. We still have plenty of clients that are pretty defensively positioned because they don't believe in this market rally, they think it's overhyped, the economy is still going to slow. So there is room for some of that money to come back in, but some of it I think is still pretty sticky.
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