With the U.S. economy expanding and the Fed gearing up for further support, 2024 appears promising for stocks.Only an inflation acceleration that would force the Fed to start raising rates again can stop the economy and stocks now. But for multiple reasons, I don’t expect that scenario to unfold.
The Economic Expansion Is Accelerating
Last month, retail sales climbed an impressive 0.3% versus October on a seasonally adjusted basis. That represented a major jump from the 0.2% month-over-month retail sales decline reported for October, compared with September.
U.S employment data came back strong in November, after the economy added 199,000 nonfarm jobs. That, coupled with the retail sales report, strongly indicates that the U.S. economy has reaccelerated.
Indeed, in the wake of the retail sales report, the Fed now expects U.S. GDP to expand at a robust seasonally adjusted annual rate of 2.6% above inflation. The central bank now estimates that fourth-quarter personal consumption expenditures growth will come in at 3% above inflation.
The Fed Is Done Hiking and Is Getting Ready to Cut Rates
Fed Chairman, Jerome Powell, confirmed that the central bank was probably done raising interest rates. He further questioned when it would become appropriate to begin dialing back on rates.
Moreover, the Fed’s rate-setting Open Market Committee predicted 0.75% rate reduction next year.
The central bank will likely help Joe Biden win reelection in an effort to prevent President Trump from regaining office. Therefore, I expect the central bank to be heavily biased towards cutting rates in 2024.
Lower rates will give businesses greater borrowing power, thereby enabling them to expand their company. Lower rates also increase consumer’s buying power, thereby boosting homebuilders, automakers and raw materials makers. The rate reduction will also give consumers the ability to diversify their purchases and invest more in stocks.
Inflation Is Likely to Stay Under Control
I don’t expect the Fed’s upcoming rate cuts to vastly increase inflation. There are multiple economic deflationary catalysts, such as student loan payment reinstatement, supply chain improvement and increased labor participation rates. Rising labor participation rates, driven by increased AI and automation will enhance worker productivity, reducing the demand for labor and lowering costs. Further, I think that the proliferation of electric vehicles globally is pushing oil prices downward.
Finally, interest rates remain much higher than anytime in the past 15 years, while government stimulus payments to American consumers have largely been spent on e-commerce and internet search. I believe this is inherently deflationary because it allows consumers to very easily compare prices from dozens of merchants and many service providers.
On the other hand, the onshoring phenomenon, the switch to renewable energy and Washington’s high spending on infrastructure are inherently inflationary. Still, I think it’s clear that there are many more deflationary than inflationary catalysts at this point.
Providing evidence for this thesis is that America’s inflation rate has generally been trending downwards for many months.
I expect the latter trend to continue for the foreseeable future, enabling the Fed to cut rates by about one percentage point in 2024.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
