Stock market outlook: No rally until Fed starts cutting interest rates – Markets Insider

Date:

- Advertisement -

The stock market won’t see a sustained rally until the Federal Reserve begins to cut interest rates, and it has no reason to cut them unless a combination of three factors occurs, JPMorgan said in a Monday note.
The S&P 500 has surged 14% from its mid-October low, but more and more investors are growing increasingly concerned that the jump is nothing more than a bear market rally that will give way to more downside as the Fed gears up for another interest rate hike next month.
“As long as central banks raise rates or keep them at current high levels, we believe assets will be rangebound with a more pronounced downside risk,” JPMorgan’s Marko Kolanovic said.
Instead, the Fed needs to cut interest rates for the stock market to mount a sustained rally that could give way to new highs.
Kolanovic said the Fed could cut rates at some point next year, but only if a combination of factors materializes, including increased unemployment, declining inflation, and “something breaking in financial markets.”
In its bid to tame elevated inflation, the Fed has already raised rates by 375 basis points so far this year, and it’s expected to hike rates by another 50 basis points at its December FOMC meeting. Investors expect a follow-on rate hike of 25 basis points in January, before the Fed ultimately pauses its rate hikes to see where the economy stands.
And a resilient economy means the likelihood of interest rate cuts is far off, according to JPMorgan.
“As an increase in unemployment is not likely to happen very soon, markets will be on edge between waiting for better inflation data, slowing economy and earnings, and rising risks of a financial accident,” Kolanovic said.
But an economic recession that materializes in late 2023 could be the final straw that causes the Fed to ease financial conditions via interest rate cuts and a pause or reversal in its balance-sheet reduction program.
“We believe the drag from an anticipated 500 basis points Fed tightening will build and last week we incorporated a mild recession into our forecast at the end of next year. However, recessions are disruptive events that normally reflect the interaction of Fed tightening with shocks and the response of a vulnerable private sector. This recipe is not yet in place and it is unlikely that recession will take hold as we turn into the New Year,” Kolanovic wrote.
Until then, investors shouldn’t put too much stock in a stock market rally unless the Fed gives signs that it’s going to pivot away from tightening and towards easing financial conditions. 
Read next
Indices
Commodities
Currencies
Stocks

source

- Advertisement -

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Share post:

Subscribe

ADVERTISEMENT

Popular

More like this
Related

Ghana, creditor panel agree on debt restructuring, paving way for IMF cash

Ghana has finalised a pact with its official creditor...

Nigeria strikes deal with Shell to supply $3.8 billion methanol project

Nigeria has struck a deal for Shell (SHEL.L), opens new...

Africa’s $824 billion debt burden and opaque resource-backed loans hinder its potential, AfDB president warns

Africa's immense economic potential is being undermined by non-transparent...

IMF: South Africa needs decisive efforts to cut spending

South Africa needs more decisive efforts to cut spending...