Markets Show Continued Strength as Economic Data Weakens
Two years ago, this past June, we were in the middle of the largest price increase in 40 years, as measured by the CPI. Year-over-year inflation in June of 2022 was roughly 9%, after a 5% increase the year prior. During 2021, the Fed had been slow to increase interest rates with the view that inflation was temporary or “transitory,” as they liked to say. But by mid-2022, the decision was made that inflation was not temporary and that intervention was needed to keep prices in the economy from spiraling out of control.
To try and push inflation down, the Fed began to raise interest rates aggressively, increasing the cost of doing business and buying assets, thus slowing the economy and bringing inflation down. Their long-term goal is to achieve 2% annual inflation. Since then, inflation has come down considerably but remains around 3% and has been in that range since mid-2023.
Between the beginning of 2022 and mid-2023, the Fed raised rates by 5.5%
2024 thus far has been characterized by stubbornly high inflation and a stubbornly resilient economy. Coming into the year, the market was pricing that the Fed would achieve its inflation goal and cut interest rates by nearly 2% this year. What has happened is that inflation has remained above the 2% goal, and interest rates haven’t budged. Markets currently expect 1-2 cuts between now and year’s end.
Most recently, we’ve started to see slower economic data. June marked the first month since the pandemic, where prices decreased, and the unemployment rate has risen above 4%.
In June, prices decreased month over month, leading to an annualized inflation rate of 2.97% since June 2023
After coming down dramatically since the pandemic, unemployment has started to tick higher
Rate cuts are mathematically a “good” thing for the stock market, as it becomes harder to find returns in “safe” investments like bonds and money market funds. The recent soft data has increased expectations for a rate cut as we get into the back half of the year, and the market so far likes that. The downside is that the rate cuts are happening because of a slowing economy, so we will have to monitor to what extent the economy slows and to what extent that may impact corporate earnings.
Markets must net these opposing forces out as we chart a path for lower rates in the coming months and years. We believe this will create some volatility but also pave a path forward for future economic expansion in light of lower rates and corporate innovation.
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