The Federal Open Market Committee statement, in which the Fed announced that it left interest rates unchanged, was a modest disappointment for stock bulls. The base case for most equity investors on the FOMC meeting was: 1) few, if any, changes in the economic outlook and 2) the majority of Fed officials indicating that they supported two rate cuts this year. Policymakers delivered on the former but not the latter. The economic outlook was essentially unchanged, though the 12-member committee did change the inflation outlook, saying that “there has been modest further progress,” erasing an earlier view that “there has been a lack of further progress” in capping inflation. On rate cuts, the majority supported only one rate cut, not two, and four were in favor of no rate cuts. That is a disappointment. It’s a disappointment because so much of an additional leg up in the market is centered around this “Fed pivot,” where the Fed moves from keeping rates high to cutting rates. That would signal that the Fed is winning the fight against inflation. So why was the S & P 500, up 56 points before the announcement, off only a few points from that level immediately after? I think it has to do with the market conditions. Here is what we have powering much of the gains: disinflation, still-strong jobs, rising earnings and a big new tech paradigm in the form of artificial intelligence. That is not a recipe for a declining market. Many have taken to comparing 2024 to 1995. There are some similarities: the Fed began cutting rates that year, inflation (as measured by the personal consumption expenditures index, the Fed’s preferred gauge) was falling, earnings were rising, and there was also a shiny new tech paradigm, this one called the internet, that had just begun to capture the public’s imagination ( Netscape had just gone public in a sensational debut in August of that year). So investors did not get the two rate cuts they wanted. What’s the implication? For the short term, it likely means that a lot of money sitting on the sidelines waiting for that “Fed pivot” will likely stay on the sidelines. But when compared to the main drivers of this market (disinflation, still-strong jobs, rising earnings, and a big new tech paradigm in the form of Artificial Intelligence) it’s only a modest disappointment.
