2024 was supposed to be an easy year for Wall Street speculators. The economic situation was improving, there was a clear way to trade and a chance to relax while accumulating profits. Inflation has wiped out that, and now it’s almost certain that Wall Street’s summer will also be cancelled.
After a stellar stock market rally in 2023, the Street entered the year hoping for nirvana, a combination of healthy corporate earnings, strong household spending, and the ultimate defeat of high inflation. This combination puts the Federal Reserve on track to cut interest rates. This will reduce debt costs, boost stock prices, and make consumers feel better off.
But inflation turned out to be stronger than expected, and interest rate cuts began to disappear from the picture. First, Wall Street pushed back its first forecast for a rate cut from March to June and then September. Investors are now beginning to wonder whether rates will ever be cut at all.
“This is not what we were told we would sign up for, that’s for sure,” Jasper Capital portfolio manager Justin Simon told me. “There was going to be a rate cut and everything was going to the moon. That’s why people bought stocks. Now that seems relatively unlikely.”
With expectations for interest rate cuts fading, the performance of major stock indexes has become decidedly “so-so.” Since early March, when this new reality began to sink on Wall Street, the S&P 500 is down 0.2% and the tech-heavy Nasdaq is down 0.7%. But worse than that, interest rates could continue to rise for an extended period of time, changing the shape of the economy and, as a result, changing what companies have been able to make in the stock market.
That means Wall Street’s fantasy of moving camp to the Hamptons for the summer has been shattered. You can’t rely on interns or junior analysts to handle the same deals as last year. There’s no set-it-and-forget strategy to boost your portfolio. I will definitely not be buying on the spur of the moment. The persistence of inflation creates uncertainty in the market, which increases volatility. Unfortunately, uncertainty and volatility don’t come with his $100 lobster cobb salad at Duryea’s. Usually painful.
when the pigeon cries
Wall Street’s hopes for a smooth summer weren’t all Wall Street’s fault. While Federal Reserve Chairman Jerome Powell has sought to be cautious, the Fed’s public rate forecasts have suggested multiple rate cuts in 2024. To the financial world, that sounded like a bit of a victory lap against inflation, meaning the United States would overcome inflation. It will likely stick to a soft landing, a Goldilocks scenario in which prices stabilize without slowing the economy enough to cause a recession.
But as the new year began, things started to go awry. Inflation data shows prices are still rising at an uncomfortable pace, with the core consumer price index, which excludes volatile categories such as food and energy, rising 3.8% year-on-year in March. . The Fed’s preferred inflation measure, the Core Personal Consumption Expenditure Index, also remains stubbornly above the central bank’s 2% target. Economists began to suspect that the price spikes were not just caused by companies opportunistically jacking up prices to inflate profit margins, but rather that something more permanent was to blame. . Wall Street began to seriously worry that valuable cuts would not come. JPMorgan CEO Jamie Dimon urged everyone not to be “lulled into a false sense of security” that a soft landing is near.
There was going to be a rate cut and everything was going well. That’s why people bought stocks. Now that seems relatively unlikely.
The Fed acknowledged in a statement last week that although the economy is on solid footing, “there has been no further progress toward the Committee’s 2% inflation target in recent months.” It said it would keep interest rates at current levels, reiterate its commitment to data independence and remain “very attentive to inflation risks.” In other words, it’s still possible that the data points to further worsening of inflation. Some analysts, including Torsten Slok, chief economist at Apollo, see signs that the economy could turn south.
“Energy prices continue to rise and manufacturing recovers, increasing the likelihood of higher commodity inflation in the coming months,” Slok said in a recent email to clients.
If such a scenario were to play out, the Fed could not only keep interest rates at 5% but also consider raising them. Powell said at a news conference Wednesday that a hike was “unlikely” but did not say it was not a consideration. He also wouldn’t speculate on where this persistent inflation is coming from, saying only “time will tell.”
In Wall Street probability terms, that means Nirvana has become much less likely. This is not to say that the economy is all bad or that there is no hope. Gross domestic product (GDP) rose 1.6% in the first quarter, lower than economists expected, but fundamentals were more promising. Unemployment remains near historic lows and wages continue to rise. Consumers are still spending that money, too, and retail sales are strong. On the business side, David Lefkowitz, head of equities at UBS, said in a recent note to clients that “corporate fundamentals are largely strong and intact,” with about 75% of the S&P 500 companies reporting first-quarter earnings. said it exceeded expectations. Of course, this is good news…unless it turns out to be bad news. For the economy to soften, it really needs to land. If the U.S. reverses policy, there is a risk that inflation will rise again, forcing the Fed to take more drastic measures to keep prices in check. The April employment report showed that 175,000 jobs were created, lower than the expected 238,000, but employment remained at less than 4% and wage growth slowed. Wall Street loved it. It was growth, but not excessive growth. Goldilocks, April 25 Weather — “Not too cold, not too hot, all you need is a light jacket.”
Paradoxically, there are signs that things are not as dour as they seem. McDonald’s missed quarterly profit estimates for the first time in two years as customers “became more discerning with every dollar they spent,” the company said. Starbucks’ sales have declined for the first time since 2020, but the company’s CEO said the company is in a “very difficult environment” due to “pressures facing consumers.” Pepsi’s organic sales declined 2%. What all these companies have in common is that in the past few years they were able to squeeze more money out of their customers by raising prices dramatically, but they can’t do that now. Money is tight, and they can’t now push prices higher than sales volume. We expect this theme to repeat across the market. The bad news is that this means consumers, the engine of the U.S. economy, are getting tired. The good news is that this means these companies won’t contribute to inflation.
“We certainly hope that inflation has peaked,” said Cyrus Myers, co-founder and CEO of investment firm MarVista Investments. “But there is a big crack in consumer spending at the bottom. People are buying and selling products.”
All this conflicting information raises a lot of questions on Wall Street. Do we actually need to raise rates further, or should the Fed just wait for things to calm down? How much worse will things get if we need to keep trying to lower inflation? ? What if the acceleration in inflation is false and the economy is actually weakening? Would it be a mistake to cut interest rates now? You can see why this tug-of-war keeps Wall Street wary and Georgica Beach at bay.
What works and what doesn’t
As interest rate cuts seemed certain and Wall Street bettors were deciding which oceanfront party to attend this year, this year’s market seemed like an easy choice. If interest rates fall, there will be more money in the stock market, indexes will rise, and there will likely be the same winners as last year. But as doubts about the economy crept into the minds of Wall Street, so did concerns about these deals.
Higher prices over time means business models that have worked in the past may no longer work. Investors need to be a little more discerning. The bet that a company will develop technology and figure out how to monetize it after the fact is already punishing compared to the bet on disciplined, profit-driven management. Take, for example, the Magnificent Seven, a group of tech stocks that dominated the market in 2023. The fates of these companies such as Nvidia, Tesla, Microsoft, Meta, Apple, Amazon, and Alphabet have diverged as the market has come to believe the reality. About the artificial intelligence revolution. After Meta reported impressive earnings last month, investors sent the company’s stock plummeting 10% after the Zacks family announced it would spend $35 billion to $40 billion this year on developing AI products. I can’t say exactly how that investment will be monetized. In a world where money is becoming more expensive, these are the kinds of questions that the market is rushing to find answers to. Microsoft and Alphabet, which have already started monetizing their investments, fared much better.
“People are really worried about the hawkish pivot because I think they own all the wrong things,” Simon said. When a trade is hot on Wall Street, you can expect everyone to rush in, but if the trade reverses, you can expect a rush to the exits. That can end up causing very dramatic market movements, pushing the index down and, frankly, ruining a trader’s day if they’re not careful. So it’s time to pay attention.
The simplification that Wall Street wanted is one of the few options that is no longer on the table.
The new system doesn’t just apply to Wall Street stock investors. The longer US interest rates remain high, the more the US monetary policy will deviate from the rest of the world. Inflation is receding in the EU and UK, and interest rate policies appear to be on the decline. Japan’s interest rates are barely above zero. With hot money flying around the world in search of the safest havens, this divergence represents a major shift. As if to emphasize this fact, on the day of Chairman Powell’s speech, the value of the Japanese yen soared by 1% per second against the dollar. This was a massive move by currency trading standards and a vicious reversal considering the past year. , the yen fell 11% against the dollar. There are people on Wall Street who can’t be “rosé all day long” on summer water in the Hamptons when currencies trade like that.
The Fed has always said there is a “long and variable lag” between when it moves interest rates and when the economy feels the move. The Fed is now acknowledging that these delays may be longer and more volatile than expected. He is one of the few options where the simplicity that Wall Street wanted is no longer on the table. Whether it’s a glass of cold lemonade on your front porch or a $210 pitcher of Gimme Shelter on Sunset Beach, simplicity is what summer is all about. That’s why it’s canceled this year.
Lynette Lopez I’m a senior correspondent for Business Insider.
