The vibe that came out of the recent Fed meeting was clearly bullish for stocks and bonds and pretty much everything else. Remember, just a couple months earlier, the consensus had been that rates might keep going up during 2024 as inflation stays out of control, and could stay at these high levels for many years.
Sentiment shifted dramatically over the past two months, and it could shift dramatically again. Probably it will. All we know right now is that the tight monetary conditions, with higher rates stifling a lot of investment (except A.I.-related), and with commercial real estate and private equity and corporate debt clearly feeling some pressure, the fight to quell inflation made better progress in the past few months than most folks expected. And that has had a big impact on what people think inflation will be in the future… which is even more important than current inflation, because that expectation about the future changes consumer and business behavior. CPI inflation is now down to almost 3%, the Fed’s core PCE inflation number is also around 3%, and the clear expectation among the economists at the Fed is that we’ll be down to something like 2-2.5% inflation by the end of next year.
A perfect outlook for stocks and bonds obviously feels lovely, and therefore people want to buy more, and everything goes up. At least for now. That doesn’t mean it will work out that way six or twelve months from now, the Fed is at least as wrong as everyone else when it comes to forecasting — but that’s the expectation that’s built into market valuations for stocks and bonds now, it means interest rates can flatten out here and probably come down a little more without creating too much “stimulus,” and that’s about as close to a “soft landing” scenario as Wall Street could hope for. If inflation is at 2.5% and the 10-year Treasury is at 3.5-4% a year from now, then rates become a non-issue and we’ll all have to find something else to worry about…Keep the investments going into healthy companies as the bull market ticks-in, for now…
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