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Wall Street expects the Fed to cut rates. That’s not a good sign


(Bloomberg) – Wall Street experts are warning investors to buy US stocks in the hope that the Federal Reserve will cut interest rates soon, keeping in mind an old saying: Be careful what you expect. want.

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Even after Fed Chairman Jerome Powell on Wednesday pushed back on speculation that the central bank was ready to reverse course, the stock market largely ignored that message, rallying Thursday on bank predictions. The central bank will start injecting stimulus into the economy in the second half of the year. Gains led by rate-sensitive stocks like fast-growing tech companies were stymied last year.

But by the end of the afternoon, gains had cooled as downside risks of the Fed’s pivot belatedly sunk in: The size of rate cuts now priced in financial markets suggests the central bank will face a recession or a severe recession that will affect companies. income. In other words, what looks like a bullish moment for stocks may not be so optimistic at all.

“A rate cut is really going to be detrimental to the equity market,” said Todd Sohn, managing director of technical strategy at Strategas Securities. “It’s the cuts that put stocks and especially the bull markets in trouble, with the most obvious recent examples being in 2000 and 2008.”

The stock market swings underscore the difficulty for investors trying to weather a period of unusually high volatility, with turmoil in the banking sector creating new risks even as inflation rises. growth is still high. Powell, who said the central bank considered keeping interest rates steady on Wednesday, continued with another quarter-point hike and said more may be needed to bring the price hike up to the next level. use back to the target.

“The ‘pause’ comment from Powell was interesting because it suggested the end of the hiking cycle could be near – but then he dropped the ‘H-bomb’ later in the press conference, giving see rates could go higher if needed depending on inflation,” Sohn said. “There’s definitely confusion now.”

Nicholas Colas, co-founder of DataTrek, wrote in a note to clients.

“If banks tighten lending standards and financial conditions worsen as a result, by the time this shows up in the data, it may be too late to avoid a recession,” explains Colas. even if the Fed cuts rates this year.” “That gives us a recipe for continuing to rock the stock market.”

The divergence in stock price direction during Thursday’s volatile trading session suggests investors are eyeing some of the possible effects of a sharp decline. While tech-heavy indexes like the Nasdaq 100 led the gain, up 1.3%, more economically sensitive stocks slipped, with the S&P Smallcap 600 Index ending 2.6 percent lower. %.

Historically, a pause in rate hikes has helped the stock market. In most of the six cases since 1970 when the Fed raised borrowing costs by more than 100 basis points for a period of a year or more and then paused rate hikes for at least three months, US stocks rallied, with the S&P 500 up 8.2% on average, according to Bloomberg Intelligence. The only exception was the burst of the dot-com bubble in 2000, when stocks fell from May to December during a pause in rate hikes.

“Investors always try to stay one step ahead. So that’s the prediction they’re pricing in,” said Adrianne Yamaki, founder of Strategy Wealth Capital. “They just don’t want to be late.”

Of course, not everyone is ready to return to growth stocks, as bank failures and falling bond yields in recent weeks have spoken to some Wall Street pundits.

Paul Eitelman, director of North American investment strategy at Russell Investments, has largely stuck to the firm’s defensive portfolio strategy, which broadly emphasizes exposure to so-called are safe sectors like utilities, consumer staples and healthcare stocks rather than profitable high-growth and tech companies, he said, profits are vulnerable to an economy is cooling.

“It was really a difficult environment because of the high volatility due to bank stress,” said Eitelman. “The risks of a recession remain high. To be more bullish on equities from here, inflation will need to cool down significantly and we need to see further moderation in wage growth.”

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