Waves of Inflation
It was a great November for the stock and bond markets, as the threat and uncertainty of future rate hikes from the Fed have now turned into thoughts of rate cuts next year. While seeing market strength and breadth widen was great, we believe the market’s timeline for rate cuts next year is premature. We, along with the Fed, know that history suggests a second wave of inflation could delay any rate cuts that are currently being discussed. Looking back at different times throughout history when inflation spiked, such as 1910, 1939, 1972, and 2019, there was a second wave of inflation. The Fed has made it clear that they are committed to finishing the job, so rate cuts might be further out than investors are expecting. We would like to see the market up for more substantial reasons, such as corporate earnings and a strong consumer, and not just up on the thought that the Fed will be cutting rates early next year, which, again, we feel is premature based on previous waves of inflation.
Rate Cuts vs. Holds
The prediction for the Fed funds future rate is going from where we are currently to four rate cuts of 25 basis points going through next year. In a chart shown in this episode, you will see that it appears that there will be more than four cuts and that they are not really in 25-basis point increments. That’s because the Fed funds rate futures market is just predicting the likelihood of a cut. It’s not necessarily saying this is what the rate will be on this specific day. It’s saying the odds are that a cut will take place at this time and possibly be higher or lower than the predicted number. A hold on interest rates is a perfect time period for the market. We prefer that the Fed hold rates instead of cutting them because the S&P 500’s performance has historically been better. It’s a Goldilocks environment as opposed to hiking or cutting rates. At this time, we think that the Fed is done hiking interest rates. Still, if we can prolong cuts, that would be better for the market in the short term since, historically, market performance is significantly better during rate holds rather than rate cuts.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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Stock investing involves risk including potential loss of principal.
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