Bryce Johnson, Principal
Inflation figures continue to be the driving force behind both the bond and stock markets entering the second quarter of 2024. Securities managers and retail investors have been closely watching the monthly tape on inflation numbers so as to glean the intention of the FOMC’s next move pertaining to its balance sheet unwinding and federal funds target rate.
The markets – and more importantly, the economy – were able to exhale with some relief as the CPI read a modest tick down from March’s 3.5% to last month’s 3.4%. The move was a reversal of a three month steady monthly increase, which, alone, shifted the overall market’s expectation of one or more Fed rate cuts from early this year. The shift in expectations caused sizable volatility in the bond markets, which compelled a sell-off in the S&P 500 late in the first quarter. Contrary forces were at play: the personal consumption expenditures index (PCE) continued its steady decline down while the wholesale inflation reading (PPI) came in at .5% from an expected .3% month-over-month.
A continuing-to-confirm element in this “back to normal” rates landscape is that higher rates are progressively likely to stay higher, for longer, going forward. What we experienced from 2022 through most of 2023 was an unprecedented bond sell-off that sent shock waves not only domestically, but across the globe. With the settling of market volatility beginning around Q4 of 2023, it’s becoming apparent that there’s a persistent decoupling of a negative consequence borne from a (sudden) higher cost of capital with an overly negative market sentiment.
While parts of the real economy will continue to cool as the cost of borrowing is as high as it’s been in over a decade, this is, in fact, “normal” in an historical context. The aim of the FOMC is to foster a “goldilocks” economic paradigm that supports a framework for robust economic growth while keeping inflation at bay. That appears to be succeeding.
Here at Risemint, we are making adjustments to our clients’ equity positions. Additionally, we’re retooling our fixed income sleeve from its current posture of sheltering the storm back into generating meaningful real yield.
The summer months are fast approaching. Typically, from June through August, trading volume ebbs. However, this year, that may not be the case as inflation and employment figures remain an open question mark. We encourage you to enjoy the time on vacation with your loved ones. We’ll be here hard at work making sure your hard earned money is prudently accounted for.
Thank you,
Bryce Johnson
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