Airline Stocks: What’s Next After the Rebound?
As the Federal Reserve prepares to announce its latest interest rate decision, investors are bracing for a potential letdown. Despite expectations of a third rate cut, markets may be in for a surprise if the Fed signals that this could be the last one.
A Historical Precedent
In 2019 and 1995-96, the S&P 500 experienced significant growth following three rate cuts. In the latter instance, then-Fed Chairman Alan Greenspan famously warned of “irrational exuberance” in the market. Today, with the economy growing at a solid 2.7% pace and core inflation firming up to 2.8%, the Fed may be justified in taking a pause.
The Case for a Pause
The surging S&P 500, up 27% this year, has led to easier financial conditions, and measures of business and consumer confidence are on the rise. Given these factors, the Fed has plenty of reason to stand pat. As Chairman Jerome Powell has explained, the goal is to reach a neutral interest rate that neither restricts nor boosts growth.
Neutral Rate in Sight
Deutsche Bank economists argue that a cut today would put the Fed right at neutral, with the neutral real rate estimated to be around 1.75%. If inflation is running at 2.5%, the neutral rate would be 4.3%, which is where the Fed would be after today’s cut.
A Lesson from the Past
Between July 1995 and January 1996, the Fed cut 75 basis points, but this didn’t hinder financial markets. The S&P 500 rose 20% in the following year, and a similar scenario could play out in 2025. Jason Draho, head of asset allocation for UBS Global Wealth Management, expects a “multiyear productivity surge” from advances in artificial intelligence, which could propel the economy without boosting inflation.
Airline Stocks Take Off
As consumers become more eager to spend on travel, airline stocks are poised to benefit. With the economy on firm footing and financial conditions easing, these stocks could continue their rally into 2025. However, investors should be prepared for potential speed bumps ahead, particularly if inflationary pressures rise.
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