Stock Market Resilience in 2024

How about nada? Does zero pique your interest?

At the start of 2024, investors had high hopes for a series of interest rate cuts from the Federal Reserve, expecting a total of six or more. However, the tide has turned, with forecasts now pointing to just three cuts. Yet, Torsten Slok, the esteemed chief economist at Apollo Global Management, goes even further to advocate for a rate cut count of zero in a recent note.

Slok highlights how the U.S. economy shows no signs of slowing down, attributing this momentum to the Fed's strategic shift since December. He asserts, "The Fed will not cut rates this year and rates are going to stay higher for longer."

While the adjustment from six expected cuts to three hasn't hindered the ongoing stock market rally, fueled by enthusiasm for artificial intelligence and tech giants, it aligns with the Fed's outlook as outlined in its dot-plot forecast.

In February alone, the S&P 500 soared over 5%, with a year-to-date increase of 6.8%, marking one of the strongest starts to a year since 2019. Similarly, the Dow Jones Industrial Average experienced a 2.2% gain in February and a 3.5% rise year-to-date. The Nasdaq Composite celebrated its first record close in over two years just last Thursday.

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Stock Market Unfazed by Rising Yields

The question for investors is how stocks would hold up in the face of a much "higher for longer" scenario. The 10-year Treasury yield briefly topped 5% last October, around the time stocks saw their 2023 bottom.

Yield Fluctuations and Market Resilience

Yields, which move opposite to debt prices, subsequently fell back and the stock-market rally picked up steam. The 10-year yield stands near 4.21% after dipping below 3.8% in late December. Higher yields can be trouble for stocks, in part by making it harder to justify stretched equity valuations.

Reasons for Fed's Stance

Chief Economist Slok offered a list of 10 reasons why the Federal Reserve will likely remain on hold, including growth expectations. He highlighted a big jump following the Fed pivot in December and the easing in financial conditions. Growth expectations for the U.S. continue to be revised higher.

Factors Driving Decisions

Other factors influencing the Federal Reserve's stance are a tight labor market, sticky wage pressures, small businesses intending to raise prices, and firms reporting higher input costs.

Financial Market Observations

Financial conditions also continue to ease following the Fed policy pivot in December. Record-high issuance of investment-grade corporate debt, high-yield issuance, rising IPO and M&A activity, tight credit spreads, and the stock market hitting all-time highs indicate strong market conditions.

Focus on Inflation

As per Slok's analysis, the Fed is anticipated to spend most of 2024 combating inflation. Hence, yield levels in fixed income are expected to remain high in the foreseeable future.