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Are Fed Cuts Star-Crossed?
Where's neutral? We still don't know. Indeed, we can't know. But sometimes, the data suggests it's higher than the Fed and economists' models are willing to admit.
The r-star discussion isn't front page news anymore, but maybe it should be. It wasn't all that long ago (i.e., just a few months) when the financial pages were replete with references to the unobservable. R-star might be esoteric, but market participants briefly became obsessed with the concept late last summer.
Any number of excus
It’s an election year, rates are going to be cut.
I agree. Even Schwab, in their recent earnings call, is complaining about how higher rates are destroying their earnings.
You nailed it Sir. Goldman’s Jan Hatzius re-asserted today that they expect first rate cut in March. Due to long and variable lags of monetary policy, there can’t be a hint of recession going into the election !!
The S&P 500 index is pretty insensitive to interest rates, given the weight in Mega-Tech. The most rate-sensitive sub-sectors (banks, real estate, etc) aren’t big in the index.
“Insensitive” means both index earnings and investors’ response to earnings. For example, so far in 4Q23 earnings season the reports have been underwhelming. S&P 500 margin so far is down QOQ and YOY and the lowest since 2020, per what I’m reading. Bar is low so 67% of companies have beaten 4Q, but only 37% saw 1Q24 consensus rise after reporting 4Q23, per my count. Of course, only 10% of the index has reported so far. And the market hit new highs.
The Russell 2000, more sensitive. Mid-market private companies are feeling rates. Mom & pops are definitely feeling it. Lower and mid-income consumers too.
Good points, JL. But higher rates do impact the “no profits for as far as the eye can see” tech stocks as well as the biotech, private equity and VC sectors. They are important Mag 7’s clients, no? Or do they not move the dial for them?
I think cloud computing is mainstream enough that the customer base is diversified. Haven’t verified that.
JL – for sure.