For seven quarters, stocks and bonds have moved virtually lockstep in daily trading. When bond prices decline (and yields rise), stocks struggle. It’s typically not as simple as the binary trading market we’ve been stuck in, but since the Fed started tightening in early 2022, stock traders could have done very well knowing only the direction of rates each day in advance. Both asset classes have been remarkably fixated on the economic data – but not in the way you would think. Economic resilience and strength even have prompted intense selling time and time again despite the positive implications for corporate revenues and profits. Good news has been bad for stocks and bonds, and bad news has attracted buyers. Markets are forward looking, and most economic data are lagging, so the coincident market moves are not so much reactions to the actual data but adding that strength or weakness to the collective calculus regarding the Fed’s active policy campaign.
We still think the Fed is very nearly finished (if not already) raising rates. However, Fed officials will likely threaten the potential for additional rate increases right up until the first rate cut. It has now been a year since the most aggressive series of three consecutive 75-basis-point hikes during July-October last summer/fall and more than 20 months since this all began. That’s long enough by anyone’s standards for the “long and variable lags” of monetary policy changes to begin showing up in the real economy. New data indicate that households have largely spent excess savings and stimulus money socked away during and post-COVID and are back to relying on credit to perpetuate spending. With 70% of our domestic economy driven by consumer spending, the coming data are likely to show softness. That, by itself, is not necessarily great news for stocks, but until the Fed pauses or cuts rates it just might be.
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