The current market is highly sensitive to any indications that there won’t be a significant number of interest rate cuts from the Federal Reserve in 2024. A stronger-than-expected Consumer Price Index (CPI) report last week led to a sell-off in the markets as rate cut expectations were tempered. This trend continued when a retail sales report suggested ongoing consumer strength, signaling that inflation may not decline as rapidly as anticipated. In the last five trading sessions, the S&P 500 is down by 0.5%, and the Nasdaq Composite, being more interest rate-sensitive, is off by 1.2%.
Bank of America CEO Brian Moynihan, speaking at the World Economic Forum, expressed a view of four rate cuts in 2024, contrary to the initial market expectation of six rate cuts. Goldman Sachs chief economist Jan Hatzius mentioned that policymakers are not endorsing the idea of imminent cuts, emphasizing a more optimistic sentiment about the economy than in a long time. While Hatzius still expects rate cuts this year, he is not aligning with the six rate cuts camp.
This situation creates an above-average risk as investors try to decipher the Fed’s stance and incoming data. Some experts suggest considering adding fixed income to portfolios, especially investment-grade fixed income, which historically performs well during a Fed easing cycle. Guggenheim Investment Management’s chief investment officer, Anne Walsh, highlights the potential positive performance of fixed income in such an environment.
