Thoughts in Charts: Great Expectations

When it comes to markets, day-to-day price swings are often more about what investors expect than the underlying current fundamentals of stock prices. This is because markets are designed to anticipate future events and assign them a price today.

The Fed announced on January 31 that it is keeping rates steady. They also stated that the FOMC would need "greater confidence that inflation is moving sustainably toward 2 percent" before cutting rates, and Chair Powell emphasized at his press conference that a rate cut is unlikely at its next meeting in March.  This led to a shift in market expectations around the beginning of rate cuts. With the expectation of fewer interest rate decreases soon to come, we see downward pricing pressure on both US stocks and bonds.  

While we cheer the FOMC's work to be transparent, their messaging has driven wild shifts in expectations over the last year. We interpret the January 31st statement at face value - they don't know when they will lower rates because they do not yet have enough information to warrant the move.  

Already since that meeting, we have gotten new information. The latest jobs report showed that 353,000 new jobs were created in January, far more than the 185,000 economists expected. December payrolls were also revised up sharply to 333,000, bringing the average monthly gain over the past year to 244,000, a very healthy pace. The unemployment rate remains at 3.7%, one of the lowest in history. The chart above shows that while job openings have declined as the Fed has raised rates, there are still nearly 1.5 job openings per unemployed person across the country.

In different times, analysts would cheer a strong jobs market; however, all eyes remain on the impact to inflation and interest rates. With employment comes paychecks that can be spent, strengthening the economy, and, potentially, boosting the inflation that the Fed is working so hard to subdue. The market is concerned that these strong numbers reduce the chances that the FOMC will lower interest rates early in 2024 and causes concern that they may not lower it as many times this year as previously anticipated.

In our opinion, expectations around interest rates will shift market pricing more than one time this year. As these expectations shift to the favor of client goals, we will adjust; otherwise, we will keep steady, knowing that inflation stabilization is in our long-term best interest.

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