Discovering a Silver Lining Amidst Stock Market Uncertainty

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Investors are facing a tough realization: The Federal Reserve is not expected to lower interest rates in the near future.

The gangbusters 2024 stock rally was temporarily stalled and morale on Wall Street took a hit. Traders are worried that high rates will keep borrowing costs high for consumers, hurt corporate profits, and drag down the market.

But here's the silver lining - historical data shows that prolonged high rates don't necessarily mean big losses for portfolios. While stocks may not see much more growth in the short term, the outlook isn't all bleak.

During Fed pause periods, the benchmark S&P 500 index has seen an average increase of around 13%, according to data from LPL Financial and CNN. This data covers about 35 years and six instances when interest rates remained unchanged. In the current pause period, starting from the last rate hike in July 2023, the S&P 500 has already risen by 14%.

According to Jeff Buchbinder, the chief equity strategist at LPL Financial, extended pauses by the Federal Reserve are typically positive for stocks. In a note on Tuesday, Buchbinder mentioned that it is when the Fed is compelled to lower rates due to economic weaknesses that stocks usually experience a decline - a scenario that does not apply to the current market environment.

The US economy has shown impressive strength despite the Federal Reserve taking strong action against rising inflation by raising interest rates to levels not seen in many years. Despite this, the job market remains robust, consumers are still spending, and the stock market continues to reach new highs.

The ongoing economic resilience, combined with persistent high inflation, has led to worries that the Fed may increase rates once more. However, Federal Reserve Chair Jerome Powell recently addressed these concerns by stating that the central bank will wait for inflation to decrease further before making any changes to its policy.

Powell mentioned at the Federal Open Market Committee’s post-meeting press conference that the data this year have not increased our confidence. Inflation readings have been higher than expected.

According to some economists, the central bank is still planning to reduce rates in 2024, with at least one or two cuts expected this year. Traders are anticipating that the Fed will start lowering rates in the fall, based on the CME FedWatch Tool.

The April jobs report showed a positive sign that the labor market is slowing down without crashing. Last month, the labor market added 175,000 positions, which is the lowest number since October 2023. This is a significant drop from the 315,000 jobs added in March. The job gains in April are consistent with the levels before the pandemic, aligning with the rate of job growth needed to keep up with population growth.

In addition, first-time applications for unemployment benefits increased to 231,000 last week. This is the highest level since last August, indicating further cooling in the labor market.

Annual wage gains, which are closely monitored by the Fed as a potential inflation booster, have reached their lowest point since May 2021. The decrease in both wage gains and payroll growth last month is seen as a positive sign that the Fed may be able to control inflation without causing a recession, as some investors believe.

According to David Russell, global head of market strategy at TradeStation, the argument for rate cuts has strengthened recently. He mentioned in a note earlier this month that there is a possibility of a "Goldilocks" scenario making a comeback.

The US federal government has partnered with Wall Street in a cybersecurity alliance known as 'Project Fortress.' The goal is to protect the financial system from potential attacks and discourage hackers from attempting to breach security measures. This initiative was outlined in a letter sent to bank CEOs by a senior Treasury official, as reported by CNN.

A new public-private partnership called Project Fortress highlights the serious threat that cyberattacks pose to the economy, according to a report by my colleague Matt Egan.

US officials and bank executives are taking a stand against bad actors who aim to target US financial institutions through cyberspace. They are sending a clear message that they are closely monitoring and safeguarding the system. If anyone tries to attack the US financial system, they will be pursued and held accountable, as stated by a US official to CNN.

Project Fortress has implemented protective features like a new cyber hygiene tool that scans companies for vulnerabilities and an automated threat feed. This information was shared in a recent letter sent to bank trade groups.

However, Project Fortress goes beyond just defense tactics.

Deputy Treasury Secretary Wally Adeyemo mentioned in the letter that the alliance involves taking "offensive actions" using Treasury's national security tools and US law enforcement to show adversaries that there will be consequences for their attacks.

According to a source familiar with the situation, these national security tools consist of utilizing Treasury's sanctions team.

Read more here.

Asia’s most powerful billionaires are getting drawn into the world’s biggest election

My colleague Diksha Madhok reports that two of the planet’s wealthiest businessmen are getting involved in India’s election campaign, which is becoming more and more divisive.

India, the most populous country in the world, is currently in the middle of a huge election. Prime Minister Narendra Modi is likely to win a third term in office.

Modi is highlighting his economic achievements from the last decade, a time when India experienced strong growth. This period also saw the rise of two well-known billionaires, Mukesh Ambani and Gautam Adani.

Often compared to the influential industrialists of America's "Gilded Age," Ambani and Adani openly support Modi. Their close relationship with the Prime Minister has faced criticism from opposing politicians.

At an election rally on Wednesday, Modi seemed to suggest that his main political opponent had received money from Ambani, the chairman of Reliance Industries, and Adani, the founder of the Adani Group.

Modi questioned why his opponent had suddenly stopped mentioning Ambani and Adani in the election campaign, hinting at a possible secret deal. The term "Shahzade Ji" used by Modi is commonly understood to refer to Rahul Gandhi, the prominent leader of the Indian National Congress party.

“How much money have you taken from Ambani and Adani?” he said at the rally.

Read more here.

Editor's P/S:

The article presents a nuanced perspective on the impact of high interest rates on the stock market. While acknowledging the initial decline in stocks, it highlights historical data that suggests extended high rates may not necessarily lead to significant losses. The article cites the positive performance of the S&P 500 during previous Fed pause periods, indicating that the current market environment may not be as bleak as feared.

Furthermore, the article emphasizes the resilience of the US economy despite the aggressive rate hikes. The robust job market, consumer spending, and high stock market valuations suggest that the economy has not been significantly weakened by the Fed's actions. However, the article also notes concerns about the potential for further rate hikes and the possibility of a recession. Overall, the article provides a balanced view of the current market situation, acknowledging both risks and potential opportunities.