Market Sentiment Shifts: From Rate Cuts to Economic Strength
The recent bullish euphoria sparked by the possibility of a quick return to neutral interest rates has dissipated, replaced by a more familiar sentiment: the strength of a hot economy. Despite concerns over inflation and economic reacceleration, the market has continued to thrive, buoyed by a string of positive data releases.
A Hot Economy Trumps Interest Rate Concerns
The September jobs report, Consumer Price Index, and retail sales figures have all contributed to a sense of economic strength, outweighing concerns over interest rates. The S&P 500 has hovered around its all-time high, surpassing 5,800, as year-end forecasts are revised upward. UBS’s recent forecast of 5,850 is just one example of the growing optimism.
Little Change in Expectations
However, a closer look at market expectations reveals little change, particularly on the downside. The latest Bank of America Global Fund Manager Survey shows a slight decrease in soft landing potential, but a corresponding decline in hard landing respondents. Only 8% of respondents now predict a recession within the next 12 months.
Rate Cuts Still on the Horizon
The CME’s FedWatch tool indicates a 91% chance of a 25 basis point rate cut in November, reflecting the market’s continued expectation of easing monetary policy. Reconciling this with the potentially reaccelerating economy may seem challenging, but Minneapolis Fed president Neel Kashkari’s comment that rates are still “overall restrictive” provides context.
High Rates for Longer
Jason Furman, former Council of Economic Advisers Chairman, notes that inflation remains a bigger concern than recession, but suggests the Fed can maintain tight policy without being as aggressive as last year. The current environment may be characterized as “high – but lower than they were – for longer.”
The Market’s Resilience
The S&P 500’s ability to absorb concerns over interest rates and inflation, while continuing to push higher, is a testament to the market’s resilience. As the year draws to a close, investors will be watching closely to see if this trend continues, and whether the Fed’s expected rate cuts will provide further support for the market.
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