No, I’m not referring to the stock market even though the S&P 500 Index rose to another all-time high yesterday, it’s 43rd of the year. Impressively, 2024 has climbed into the top ten in that regard going all the way back to 1970 – and there’s a whole quarter to go yet. Rather, I’m referring to the potent cocktail that’s driving stocks to new heights – an economy that’s still chugging along at a moderate pace, and a Federal Reserve that’s now committed to significantly lowering interest rates. The two haven’t “synced up” like this in a very long time, at least as far back as the post-2008 world where debt deleveraging and disinflation ruled the day and prevented the economy from hitting its stride for many years. Back then, the Fed performed all sorts of monetary gymnastics just to try to prevent a crisis-ravaged economy from devolving into a deflationary spiral.
This time, the Fed is attempting to be proactive by easing policy prior to a recession or crisis occurring. At the moment, consumer spending is still firm, supported by a labor market that while cooling remains in relatively good shape. If the weaker areas of the economy like housing, manufacturing, and overall confidence start to come back to life on the back of lower interest rates, it could help set the stage for a global economic reacceleration next year. After all, it’s not just the Fed that’s easing off the brakes – central banks around the world are cutting rates at the fastest pace since 2020, with China notably joining the party in a big way in the past week by announcing a broad stimulus package. Since growth outside the US has been much weaker for the past several years, could a pickup driven by widespread monetary easing cause inflation to rear its ugly head again? Perhaps, somewhere down the road. Although if it does, it would be for very different reasons than the most recent experience that was largely due to pandemic-snarled supply chains, an acute shortage of labor as the economy reopened from shutdowns, and large stimulus checks delivered directly to consumers.
For now, inflation remains on its downward trajectory, as we learned on Friday with the latest Personal Consumption Expenditures inflation report showing that headline inflation has fallen to just 2.2% on a year over year basis – a whisker away from the Fed’s target. Core inflation is still a bit firmer but is likewise expected to drift lower towards 2%. On a monthly basis, core PCE showed just a 0.13% monthly increase, putting it on track to hit the Fed’s forecast for year-end and potentially giving them cover to deliver a second jumbo-sized rate cut at their next meeting in November. If “front-loaded” rate cuts help to achieve a soft landing over the next few months, it’s worth thinking about what might come after that, and a whiff of global reflation is one scenario that could develop in 2025.
Source: The Daily Shot, Bank of America Global Investment Strategy, as of 9/30/24
Source: Commerce Department, Wall Street Journal, as of 9/27/24
Carl Noble, CFA
Senior Vice President of Investments
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