The stock market has shown remarkable resilience recently, seemingly impervious to negative news. Even in the face of higher-than-expected inflation data and softer retail sales figures last week, equities remained relatively stable. By midday Friday, the S&P 500 had only dipped 0.2% for the week, with the Dow Jones Industrial Average edging up 0.1% and the Nasdaq Composite slipping 0.7%.
However, while stocks have remained calm, other financial markets have responded more sensitively. The federal-funds futures market now indicates a 58% probability of at least one interest rate cut by July, a notable shift from December’s 75% chance of a rate cut by March. Additionally, the two-year Treasury yield, often seen as a gauge of rate expectations, has risen more than 30 basis points this year, reaching 4.7%. The last time it was at this level, in early December, the S&P 500 was notably lower by 11%.
Despite these warning signs, the stock market appears to be discounting them. Investors may need to pay attention to the Federal Reserve’s upcoming monetary policy meeting, scheduled to conclude this Wednesday. While no immediate rate action is expected—with a 99% likelihood of rates remaining unchanged—the Fed’s forward guidance could provide crucial signals. The current projection, known as the “dot plot,” suggests three rate cuts this year, but there’s uncertainty around whether this outlook might shift.
“The upcoming Fed policy meeting holds significant importance,” writes Thierry Wizman, global foreign exchange and rates strategist at Macquarie, suggesting it could prolong the current period of uncertainty.
If the Fed communicates a firm stance against rate cuts for the year ahead, the market’s response might be less than favorable. “We anticipate significant price volatility, as investors may be overly fixated on the timing and scale of potential rate cuts, with market expectations potentially diverging from Fed rhetoric,” notes Brian Belski, chief investment strategist at BMO Capital Markets. Belski further expresses skepticism about the sustainability of the current pace of stock market gains.
However, there’s a counterargument suggesting that despite surface concerns, the market’s momentum remains robust. FactSet data indicates that over 60% of S&P 500 stocks have seen gains this year, reducing reliance on a few tech giants to drive performance. Despite ongoing inflationary pressures and recent increases in commodity prices, sectors like energy and materials have posted gains. Even consumer staples, known for their pricing power, have remained steady for the week, outperforming the broader index.