How worried should equity bulls be about the dramatic 2024 re-pricing across the US rates complex?

I’ve variously suggested, including this week, that the answer’s “more.” Stock bulls should be more worried than they were, say, a month ago.

After all, the situation’s no longer amenable to the benign spin that helped justify nearly two-dozen new records on the S&P in 2024 despite the increasingly onerous (i.e., hawkish) rates outlook.

Up until a few weeks ago, stock bulls could argue that a dot plot-implied three rate cuts is actually preferable to deeper cuts to the extent less easing surely means a more favorable economic backdrop and therefore a better operating environment for corporates.

The question was always whether stocks could sustain the rally in the event the market moved to price out all but one or two cuts, or even to push the first Fed cut into 2025.

In the wake of the large overshoot on the core price index which accompanied Q1 GDP data released on Thursday, market pricing reflected fewer than two quarter-point rate reductions for all of 2024, pushing us closer to a scenario where bears can ask, of bulls: Are you ok with no easing at all this year?

That’s supposed to be a rhetorical question. The answer’s “no.” Or is it? What if stocks’ resilience in 2024 isn’t obliviousness at all, but rather adaptation?

On Friday, an update on the Fed’s preferred price indexes suggested inflation remained stubborn in March, and yet equities rallied sharply. True, the PCE prints were actually better than feared in the context of the above-mentioned overshoot on the quarterly indexes, but Friday’s numbers weren’t consistent with a return to 2% inflation. Maybe the odds of two 2024 rate cuts are higher now than they were on Thursday, but that’s splitting hairs when you consider the market was priced for nearly seven cuts just three months ago.

Do note: The nature of the re-pricing has shifted. Consider the figure below, from Goldman.

That’s an attempt to decompose higher benchmark yields in 2024 by driver. “Until early April, the selloff this year had largely been driven by improving growth expectations, an important reason why equity markets and credit spreads have been so resilient to the increase in yields,” the bank’s George Cole and Vickie Chang wrote, adding that “since the March US CPI beat, the imprint on macro markets has largely been consistent with a hawkish policy shock, while the growth upgrade has stalled or fallen.”

That’s bearish for equities. Or at least it should be. And it was. Sort of. It was bearish to the tune of ~5%, the scope of a fleeting pullback which Wall Street promptly erased this week, thanks in no small part to solid reports from Microsoft and Alphabet.

The S&P headed into Friday afternoon looking for a 3% weekly gain, the best showing of 2024.

Suffice to say more than half of the “drawdown” (and try not to laugh at the notion that 5% down after a 30% run higher counts as a “drawdown”) was recouped in a matter of days.

Bears like to accuse bulls of habitually denying reality. The irony’s always the same: History shows that stocks go up over time, which means that from a 30,000-foot perspective, it’s bears who’re perpetually in denial.

One mainstay of the bear case in 2023 was the idea that eventually, monetary policy’s “long and variable lags” would exact their revenge on stocks which mistook a delayed reaction for an all-clear. There’s surely some truth to that campfire ghost story, but it’s important to note that on the household side, the delay’s a function not just of temporary factors like leftover pandemic cash buffers, but also of a structural US macro idiosyncrasy (the 30-year fixed-rate mortgage) amplified by a once-in-a-lifetime refi opportunity (mortgage rates hit a record low post-pandemic).

Yes, there’s a lot evidence to suggest Americans are running out of buying power, or else nearing a threshold beyond which consumption will have to be funded by savings or high-interest, variable-rate debt (i.e., revolving credit). Indeed, Friday’s personal spending report suggested just that: An above-consensus PCE print was paired with the lowest saving rate since October of 2022. But there’s something odd about insisting on an imminent spending collapse in the face of plentiful jobs and a rock-bottom unemployment rate.

On the corporate side, primary market activity boomed in Q1, as tight spreads (amid the risk rally) mitigated the all-in cost of borrowing. And corporate cash piles are expected to start growing again in the quarters ahead.

And then there’s the (at this point self-evident) notion that monetary policy actually isn’t all that restrictive in the first place, if it’s restrictive at all. In fact, high rates are probably contributing to demand by throwing off tens of billions in monthly interest income for households and corporates via money market funds.

All of this is prompting some observers to ask if we might’ve transitioned into a regime where markets, corporates and households have simply learned to live with higher rates. JPMorgan’s Bruce Kasman is entertaining that notion, along with the possibility that we’re experiencing a “boil the frog” dynamic, where the economy’s being slowly killed by the Fed, only without realizing it. “Between those two right now there is really support for both,” he told Bloomberg this week.

Writing in the same note mentioned above, Goldman’s Cole and Chang described the most recent leg of the hawkish re-pricing in rates as “not fatal for equity bulls,” but nevertheless indicative of “near-term risk.” That risk: The Fed may, in light of recent data, be more inclined “towards a genuinely hawkish policy stance.”

Assuming, though, that the Committee’s easing bias survives, Goldman said “the exact easing profile is less important than that the Fed stands ready to cut if growth falters.” In the meantime, “nominal growth remains robust,” and that should support earnings.

At the end of the day, this is a Fed which, notwithstanding sticky inflation in 2024, views risks to its mandate as much more balanced compared to a year ago. As such, this is a Fed that’s asymmetrically protective of growth considering where they are (or, more aptly in the context of misestimated r-star accusations, where they think they are) in the hiking cycle (i.e., at terminal).

Coming full circle, that may mean equities shouldn’t be all that worried about rates. The economy’s doing fine with rates where they are, so are households (in aggregate) and so are coporates (again in aggregate). And all hawkish posturing (and market pricing) aside, the second that’s not true is the second the Committee brings forward the first cut.