A Premature Celebration In The Markets

by | May 21, 2024

A Premature Celebration In The Markets

Last week’s excitement over potentially falling rates may have been a bit premature.

Yesterday, the Federal Reserve vice chair for supervision, Michael Barr, spoke at an Atlanta Federal Reserve conference on financial markets.

And he seemed to squash many people’s hopes of interest rates decreasing in the near future.

Here are his thoughts:

“Inflation readings in the first quarter of this year were disappointing. These results did not provide me with the increased confidence that I was hoping to find to support easing monetary policy. We will need to allow our restrictive policy some further time to continue its work.

This comes after we saw markets soar last week after 3 positive economic data releases made investors bullish that we might be getting close to rate cut time.

Fed Vice Chair Philip Jefferson also echoed that sentiment this morning, Jefferson shared that April’s consumer price index measurement was encouraging but that it was simply not enough at this point. He also shared that inflation is not coming down as quickly as he would have liked.

He went on to reference the “core” Personal Consumption Expenditures index, one of the Fed’s preferred measures of inflation, which shows that over the first four months of the year inflation is still too high in his opinion.

Fed Chair and poster boy Jerome Powell also made it clear last week that he thinks the Fed will need more than a quarter’s worth of data to really make a judgment on whether inflation is steadily falling toward 2%.

That means BEST CASE SCENARIO we could see a rate cut in September IF — and only if — the next three Consumer Price Index (inflation) reports come in and show decreasing inflation.

Where does that leave us?

Well, as I alluded to, it leaves us arguably not as positive as we’d believed last week.

However, I suspect a funny irony may play out here over the next 5-6 months.

You see, by dangling the carrot of “rates could come down” there’s been a lot of excitement and anticipation. In my view, the sentiment of a potential cut month after month has created more bullish activity than an actual rate cut!

Think about it: If rates were cut in Feb, we’d have seen a flood of bullish activity. Then as reports came in hot or other economic news hit, we’d likely slide down having already “achieved” the bullish target.

In this new world, economic data comes in sour but the bullish rate cut carrot continues dangling month after month after month.

I am not sure how much longer that carrot can remain ripe, but you certainly can’t argue with the price action.

And that’s why, my friends, I’ll end this note with the same statement you’ve heard me utter a thousand times before:

I will remain bullish until the market proves otherwise.

— Nate Tucci

P.S. Our 3 Rivers Portfolio absolutely destroyed the month of May. Just three tickers with a directional plan, income play and hybrid hedge are designed to outperform an entire “traditional” portfolio.

So far, we’re lapping them. 🙂 May will come in as a total portfolio return of nearly 100%! Our next issue is less than two weeks away, so be sure to grab it here.

What to read next