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Stocks are trading near all-time highs after Wall Street got some much-needed clarity on the path of inflation and interest rates. Will this continue?
The stock market has been surging in 2024, driven by robust corporate earnings and a boom in artificial intelligence. But the rally has been blunted in recent months by a series of better-than-expected inflation reports and economic data that has raised concerns that the Federal Reserve may wait longer than expected to cut interest rates.
Last week, both the S&P 500 and Nasdaq Composite Indexes closed at multiple record highs after weaker-than-expected consumer and producer price indexes for May boosted Wall Street hopes that inflation would fall again.
Still, the Fed kept rates on hold on Wednesday and signaled it would cut rates just once this year, down from the three it had previously expected. Traders expect the Fed to start cutting rates as early as September, according to the CME FedWatch tool.
If the Fed is still expected to keep its key lending rate high for an extended period of time despite subsiding inflation, what does that mean for the stock market?
Before the Bell interviewed and discussed with Jack Janasiewicz, Chief Portfolio Strategist at Natixis Investment Managers Solutions.
This interview has been edited for length and clarity.
Before the Bell Rings: What was your biggest takeaway from last week?
Jack Janasiewicz: The bottom line is that the disinflationary impulse is coming. [Fed Chair Jerome] Powell said, [hotter-than-expected] The inflation data for January, February and March may show some signs of anomalies or pauses, but they are not a reversal of the trend toward the 2% target. So, again, we are heading in the right direction, maybe slower than people would like, but we are heading toward 2%.
And the other thing I want to point out is that the labor aspect of their mission is becoming a little more focused. [The Fed] It is one of the few central banks that has a dual mandate of price stability and full employment. It feels like the price stability aspect has become more of a focus. When the economy starts to slow down a little bit and unemployment starts to rise a little bit, the Fed [could start] The focus will be on keeping the unemployment rate from rising.
That could be the trigger for a rate cut. So we’re not ruling out a rate cut by September. A rate cut is easily possible. The data shows that, but the big takeaway for us is [inflation] You are moving in the right direction.
What is the impact on the stock market?
This is kind of a Goldilocks scenario for the stock market. Inflation is trending down, but it’s slightly above target. That’s good for corporate earnings, and the economy is still growing above trend. And even if it slows down, don’t forget where you started: you started from above trend growth. So if you slow down, you might slow down to trend. That’s a pretty good backdrop. That’s good for corporate earnings. And, not surprisingly, that’s why the market continues to hold up.
We wouldn’t be surprised if there was a downturn, but the fundamentals of the economy are still very strong, so essentially what we’re telling our clients is that if there is a downturn, they should consider buying more, so if stocks fall 5% or 10% over the next month or two, they should put their money to work, not be risk averse, because the fundamentals of the economy are still very strong.
Do you expect some of that cash sitting on the sidelines to flow into the stock market?
Some of that will come back, but I don’t think it’s all going to come back because you’re still earning a decent yield in your money market accounts. People are holding cash as cash, which is kind of its own bucket, so replacing that bucket with equity risk is not quite the same.
But I think some of that will come back into the market. We still have a lot of clients who don’t believe in the market going up, who think it’s overvalued, who think the economy is still going to slow down, and who are pretty defensively positioned. So there’s room for some of that money to come back, but I think some of it is still pretty sticky.
Anyone who has paid any attention to the housing market over the past 20 years will know that buying a home has become much more difficult than it used to be, not just in the United States but in many countries.
But as my colleague Hilary Whiteman reports, a new report sums up the feelings of many potential homebuyers by labelling several major cities as “just out of reach.”
The report compared median incomes and median home prices and found that the pandemic’s demand for homes with outdoor space, land-use policies aimed at curbing urban sprawl, and investors flooding the market have all contributed to the price hikes.
Cities on the US West Coast and Hawaii accounted for five of the top 10 least affordable places to live, according to the International Demographic Housing Affordability Report, which has tracked home prices for 20 years.
Perhaps unsurprisingly, the most expensive cities to buy a home in the US are in California, with four cities making up the top 10: San Jose, Los Angeles, San Francisco, and San Diego.
Hawaii’s capital, Honolulu, also ranked sixth out of 94 major markets across eight countries.
Australia is the only country outside the US to top the “incredibly unaffordable” list, with southern cities Sydney, Melbourne in Victoria and Adelaide in South Australia topping the list.
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Apple and OpenAI’s complicated partnership
Last week, OpenAI CEO Sam Altman attended Apple’s annual developers conference, wandering the campus and mingling with current and former executives, including Apple co-founder Steve Wozniak. About an hour later, the iPhone maker announced that it had launched a rumored We’ve partnered with OpenAI to bring ChatGPT technology to devices later this year.
But Altman, who has emerged as a leading voice in generative AI in the 18 months since ChatGPT’s launch, did not appear at any of Apple’s public presentations, either in person or livestreamed, as my colleague Samantha Murphy Kelly reports, nor did he appear at a closed-door press conference with Apple CEO Tim Cook and other executives to discuss privacy, security, and the companies’ partnership.
“I wasn’t surprised that Sam Altman didn’t appear onstage,” Ben Wood, an analyst at market research firm CCS Insights, told CNN in an interview. “Apple needed to carefully manage its messaging. OpenAI is just a vehicle for broader AI-powered questions that aren’t core to the Apple experience. His appearance on the livestream would have just created unnecessary confusion.”
Earlier this week, Apple unveiled several AI-powered features coming to iPhones, iPads and Macs this fall, most of which are powered by the company’s proprietary technology called Apple Intelligence.
The company plans to offer OpenAI’s much-talked-about ChatGPT tool on a limited basis, typically only when Siri is active and needs further assistance answering a query.
In some ways, Apple’s decision to invite Altman to the announcement but not have him appear in public indicates that it is proceeding with the partnership cautiously.
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