The Federal Open Market Committee (FOMC) meeting met dovish expectations, reinforcing a significant support for the 2024 market rally: the anticipation of rate cuts.
According to the latest note from Sevens Research, Federal Reserve Chair Jerome Powell "all but said a September rate cut was coming" and suggested the possibility of "several" rate cuts in 2024, prompting a strong market rally.
Market reactions were swift, with Fed fund futures now pricing in three rate cuts in 2024, specifically 25 basis points cuts in September, November, and December.
Sevens Research noted, "As often happens with market reactions to Fed utterances, the Fed gives investors an inch and they immediately take a proverbial yard." This reaction led to the S&P 500 and the equal-weighted S&P 500 ETF (RSP) hitting new all-time highs.
The firm believes the short-term market implications of these expected rate cuts are positive. Sevens Research observed that investor expectations for more rate cuts "elicit a Pavlovian response in investors to buy stocks," contributing to the recent rally.
Analysts anticipate that if economic data and earnings remain stable, the S&P 500 (SPY) could reach new all-time highs soon.
However, Sevens Research cautions that while the market is focused on Powell's dovish message, it's crucial to remember the reasons behind these rate cuts.
They note that Powell indicated that the Fed is increasingly concerned about economic growth, particularly the labor market, which he described as facing "real risks." This concern hints at a potential "growth scare" if the labor market deteriorates.
Sevens Research summarizes the situation: "The Fed is clearly telling us they are going to cut in September. Powell also hinted at several rate cuts in 2024. Why? It's not because inflation is so low they can cut aggressively. It's because they are getting worried about growth."
Sevens states that the key question for markets in the latter half of 2024 remains whether the Fed is going to cut rates in time to avoid a slowdown.