 "Federal Reserve Chair Jerome Powell")
Jerome Powell | (Photo: Bloomberg)
With interest rate cuts almost certain, investors are now turning their eyes to economic data in the coming months. They want to see if the “soft landing” story that has boosted U.S. stocks in 2024 can keep going.
Federal Reserve Chair Jerome Powell said on Friday that “the time has come” to start lowering interest rates. This was a more comforting message than many investors expected from the annual conference in Jackson Hole, Wyoming. This process will probably start next month, with a 25 basis-point cut at the Fed’s monetary policy meeting on Sept. 17-18.
US Stock Market on High Alert
Powell’s comments are not a sign that everything is fine. With the S&P 500 up by 18% this year, and stocks valued highly, market players will need continuous proof that the economy is on a smooth path, where growth stays strong while inflation slows down.
What US Investors Wanted to Hear
“What the market wanted was to hear that the rate-cutting cycle is starting,” said Alessio de Longis, a senior portfolio manager at Invesco Solutions. He added, “But is the Fed saying they’re worried about the economy now? If that’s true, maybe the excitement about the rate cuts should be seen differently.”
Historical Insights of USA Stock Market
History shows stocks usually perform better when rate cuts happen during strong economic growth rather than a slowdown. Since 1970, the S&P 500 has grown an average of 18% one year after the first rate cut in non-recession times, according to Evercore ISI strategists. During recession periods, the index only rose an average of 2% a year following the first cut.
Key Economic Data Ahead
In his speech, Powell noted that the Fed does not want further cooling in the labor market and aims to prevent more job losses. Jobs will be in the spotlight when the U.S. releases a crucial employment report on Sept. 6, following weaker-than-expected labor market data earlier in August.
Other significant upcoming data includes two monthly inflation reports: the personal consumption expenditures price index on Aug. 30 and the consumer price index on Sept. 11.
More signs of economic weakness could again shake up stocks and change expectations toward a 50 basis-point cut next month. On Friday afternoon, the likelihood of such a move was about 35%, compared to around 29% before Powell’s speech, with the remaining expectations for a 25-basis point cut, futures data showed.
Easing with Caution
“The Fed is easing, but the economy isn’t very weak, and inflation is still above target. This allows it to ease significantly if there is any sudden weakness,” wrote Rick Rieder, BlackRock’s chief investment officer of global fixed income, in a note on Friday.
Quincy Krosby, chief global strategist at LPL Financial, said a key factor for stocks is whether rate cuts are coming due to moderating inflation or a weakening labor market. The market wants rate cuts because inflation is coming down,” Krosby said. “But the question is whether we will see more job weakness.”
Possible Challenges Ahead in the USA Stock Market
Positive economic data could boost stocks during what many expect to be a volatile trading period. September has historically been the weakest month for stocks, with the S&P 500 averaging a 0.78% decline since World War Two, according to data from CFRA.
High stock valuations might also make investors less willing to keep stocks if bad news hits. The forward price-to-earnings ratio for the S&P 500 is at 21, up from 19.6 in early August, according to LSEG Datastream. The index’s long-term average is 15.7.
Political Uncertainty
A tight presidential race between Vice President Kamala Harris and former President Donald Trump could also cause uncertainty leading up to the Nov. 5 election.
“The longer-term trends in stocks are solid, and any weakness is an opportunity to add exposure,” said Andre Bakhos, managing member at Ingenium Analytics LLC. In the short term, he added, “We’re going to see erratic, volatile moves because no one really knows what will happen now that Powell has shown his hand.”
