Investors are on cloud nine after Federal Reserve Chair Jerome Powell hinted at potential rate cuts coming next year, fueling a potential 2024 bull run. Indeed, Fed officials forecast as many as three interest rate cuts in the coming year, signaling that the U.S. economy is entering a new stage in its inflation fight.
What does this mean for stocks?
Well, by most accounts, the notion of falling lending rates is bullish for the stock market. Indeed, high interest rates tend to work against spending, economic growth and unemployment — all things that hurt publicly traded businesses. As rates fall, it’s only reasonable to expect stocks to enjoy a boost from a lower cost of borrowing.
That’s especially true for high-growth companies that are financed largely by debt, which will essentially enjoy lower costs as a function of lower lending rates. This is what has investors so optimistic. It’s also likely what pushed the S&P 500 and Nasdaq Composite to jump more than 1% following the Fed meeting.
Fed policymakers projected the benchmark rate would lower to 4.6% by the end of 2024, down substantially from their 5.1% estimate released in September. Given rates are currently in a range of 5.25% to 5.5%, this implies that the Fed will cut rates about 75 basis points next year.
While Powell avoided directly declaring victory on inflation, he was certainly in good spirits at the final Fed meeting of the year.
“Inflation has eased from its highs, and this has come without a significant increase in unemployment — that’s very good news,” Powell stated.
Recession Fears Still Elevated Heading Into 2024
The story is a bit more complicated, however. The Fed is expected to cut rates for two reasons.
First, as mentioned, evidence is mounting that inflation is on its way down to Fed-acceptable levels, reflected in the recently released Consumer Price Index (CPI) report. As such, overly restrictive interest rates are unnecessary.
Secondly, however, the Fed is likely looking to cut rates as a way to eschew or dampen the effects of a potential recession.
For most of this cycle, everyone from Fed officials to Morgan Stanley economists has warned that the fastest pace of rate hikes in decades may give way to a potentially lengthy economic slump. Many had forecast that this slowdown would hit in the second half of 2023, although at the finish line of the year, such predictions were, at the very least, early. In fact, unemployment and consumer spending have been shockingly resilient in the face of the Fed’s aggressive monetary policy.
Will Stocks Go on a Bull Run?
While this could mean the Fed is in fact successfully executing a “soft landing,” some experts — including Powell — believe it may only be a matter of time before the economy experiences some rate-induced slowdown.
“Inflation keeps coming down, the labor market keeps getting back into balance,” Powell said this week. “It’s so far, so good, although we kind of assume that it will get harder from here, but so far, it hasn’t.”
The notion of “don’t fight the Fed” has long applied to the stock market. Should the economy take a worse-than-expected path, stocks could end up paying for it. Still, according to many investors, a bull run may well be coming.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
