Market Update June 2024
June 12, 2024
Federal Reserve policy announcements and outlook
As you know, we continue to believe that the most important investing signal to watch is the actions of the Federal Reserve.
At the Fed’s June meeting, the committee voted unanimously to keep the Fed Funds Rate steady at 5.25-5.50% -- their seventh consecutive meeting holding the rate steady.
The Fed has also begun implementing the previously announced slowing of US treasury purchases and at the latest meeting added US mortgage-backed securities to the mix. This means the Fed is still tightening the money supply, but at a slower pace than before. Wall Street views this as a positive step towards the Fed ending tighter lending conditions.
The Fed’s analysis points to a mixed opinion on the US economy. For example, while inflation has recently come down to 3.3%, this rate is still higher than the Fed’s target of 2%. Moreover, the latest figures on US GDP growth from the Bureau of Economic Analysis shows growth at an anemic 1.3% annualized year over year rate. This means that inflation is outpacing the growth of the economy. When inflation outpaces growth, it puts stress on the economy.
The current median expectation is for one rate cut before the end of the year. Wall Street views this as a hopeful sign and stocks responded positively to the announcement. However, given that the individual Federal Reserve members were mixed on whether a Fed rate hike would occur this year, the timing of the first-rate hike is still largely up in the air.
What this means for us
The impact of this cut (if/when it comes) will be far greater than just decreasing the rate. It will be an important signal to the US stock market that the easing cycle has begun and that the Fed is moving to a more accommodative policy, which historically has been very positive for US stock prices.
The risk underneath the surface is the stress US consumers and businesses will experience if the economy continues to grow at a slower pace than inflation.
Even though we are still in the waiting room for the Fed’s first rate cut, overall, the risk/reward remains in a favorable state. The US stock market is in a very good position to continue its upward trend. We continue to maintain a diversified mix of US treasuries and US stocks, depending on your individual circumstances and risk posture. Within US stocks, we continue to emphasize technology and AI companies, which are expected to drive long-term growth.
The next Fed FOMC meeting is July 30-31. We’ll be watching closely.