The dovish shift by the Federal Reserve caused the Dow to reach a historic high last week, and the S&P 500 index also began charging towards its peak this week.
As the suspense surrounding interest rate cuts is revealed, seasonal effects and a shift in monetary policy are expected to provide more support to the market. However, many institutions believe that due to the uncertainty of the economic and corporate profit prospects, the market may go too aggressively, and Bank of America warns in its report to be cautious of the risk of overcrowding in trading.
Pigeon style Federal Reserve ignites the market
The Federal Reserve held interest rates unchanged for the third consecutive time last week and predicted in its new economic outlook (SEP) that it will cut rates three times in 2024.
Boris Schlossberg, macro strategist at BK Asset Management, said in an interview with First Financial reporters that the outside world had only expected the Federal Reserve to suggest that the interest rate hike cycle had reached its end, but Powell surprised the market and mentioned focusing on not making the mistake of maintaining excessively high interest rates for the long term; Quota; Obviously, the Federal Reserve has already targeted interest rate cuts as its next step& Amp; Quota;
According to federal funds rate futures, the likelihood of the first rate cut in March next year is close to 70%, with a possibility of 5 rate cuts throughout the year. Affected by this, the yield of benchmark US 10-year treasury bond bonds dipped near 3.90% on Monday, hitting the lowest level since August. It is worth mentioning that the intense speculation about future interest rate cuts has further relaxed the global financial situation. Goldman Sachs research has found that indicators reflecting market liquidity are currently at their most relaxed period since early August.
Seasonal factors may bring favorable winds. According to data from LPL Financial, December has been the third best month for the S&P 500 index since 1950, and the second half is usually better than the first half. The institution also predicts that previously bearish investors will give up their positions to provide support to the market.
After reaching a milestone of 37000 points last week and breaking a historic high, the US stock market is expected to hit a new record this week. Driven by technology stocks, the S&P 500 index rose more than 0.5% on Monday, only 1% away from the high it reached in January 2022.
Mona Mahajan, senior investment strategist at Edward Jones, said that an environment that may be conducive to expanding the upward trend is beginning to take shape& Amp; Quota; The yield on US bonds is cooling, inflation is slowing, and the Federal Reserve is in a wait-and-see state, which is usually a good background for risky assets& Amp; Quota; She said:& Quota; Usually, when returns start to decline, valuations expand, and the more meaningful areas of valuation expansion we can see are not in the technology sector of large cap stocks& Amp; Quota;
Optimistic expectations and trading congestion
Driven by expectations of interest rate cuts, data from the Commodity Futures Trading Commission (CFTC) shows that short bets on two-year US Treasury bonds are at historic highs. The logic of market risk appetite has been attempted by the Federal Reserve; Quota; Fire extinguishing; Quota;. Last week, New York Fed Chairman Williams stated that the Fed is still monitoring whether its monetary policy is on the right track to continue bringing inflation back to its target of 2%.
Bank of America has issued a warning in its latest report that due to overcrowded trading, it may encourage investors to take profits. The agency found that as the US stock market rebounded by more than 10% since the fourth quarter, leveraged funds have begun to increase their short positions.
Schr ö sberg told First Financial that the current interest rate cut pricing seems too optimistic; Quota; Even if interest rates are to be lowered in March next year, the Federal Reserve still needs to communicate at its meeting in January, but so far it has no intention of discussing the details. On the other hand, with a gap of nearly two months between the January and March meetings, the uncertainty is very significant& Amp; Quota;
As the Federal Reserve is expected to enter a rate cutting cycle, the outside world's views on the economic outlook are becoming increasingly optimistic. The Atlanta Federal Reserve's GDPNow tool shows that with the support of consumer spending and the labor market, GDP is expected to grow by 2.6% in the fourth quarter, significantly higher than the low point of 1.2% in mid November. According to US media statistics, Wall Street believes that the proportion of institutions in the United States that can avoid recession next year has significantly increased compared to the first half of the year.
Schlossberg believes that a soft landing may not be a good thing for the US stock market, as the pressure on profit expectations will increase. However, the Federal Reserve predicts that the US economy will slightly slow down next year. According to LSEG Datastream, the 12 month P/E ratio of the S&P 500 index is 19.1 times, far higher than the long-term average of 15.6 times. Analysts predict that the profits of S&P 500 index constituent companies will increase by 11.4% in 2024 after growing by 2.6% in 2023.
Michael Wilson, a Wall Street star analyst and Morgan Stanley US stock strategist, recently suggested that US corporate profits may weaken in the fourth quarter due to pressure on profit margins. This strategist emphasized their general expectation for the fourth quarter to& Quota; Significantly reduce& Quota; He expressed his views and expressed that he is not as optimistic as other strategists about the increase in profit margin next year; Quota; We believe that profit risks will continue to exist in the short term until the overall recovery takes hold next year& Amp; Quota;
It is worth mentioning that the Federal Reserve has not denied the possibility of a recession, as mentioned by Powell at the press conference. From a historical perspective, there have not been many successful cases of the Federal Reserve achieving a soft landing in a tightening cycle similar to this round of interest rate hikes. Stephen Bartolini, Chief Portfolio Manager of US Core Bond Strategy at global asset management giant T. RowePrice, said:; Quota; The soft landing pricing in the market is very perfect& Amp; Quota; He believes that most of the decline in US Treasury yields has been completed; Quota; If we want to push up yields from here, it must be because the market expects the economy to be in recession& Amp; Quota;