Recent data shows that, in line with my previous predictions, the economic expansion and the stock market remains very strong while inflation is in control. That combination should be pretty positive for U.S. stocks going forward. Moreover, the Federal Reserve remains poised to cut interest rates significantly this year, representing another development that should boost U.S. stocks in the future. Also noteworthy is that, with inflation tame and economic growth remaining strong despite elevated interest rates, the Street finally seems to have essentially given up its obsession with rates and its “good news is bad news” mentality.
And although geopolitical tensions could cause stocks to pull back meaningfully at times this year, I don’t expect these issues to eradicate the bullish stock market in 2024.
Data Shows That the Economy Remains in Very Good Shape
U.S. gross domestic product grew at a 3.3% annualized, seasonally adjusted rate above inflation last quarter. That was well above the 2% expansion that the Street, on average, had anticipated.
Moreover, the core personal consumption expenditure (PCE) index climbed at a 2% annualized rate last quarter. The latter metric shows that inflation is indeed in control.
The Fed Still Looks Poised to Cut Rates
As I noted earlier, the core PCE index, known as the Fed’s “preferred measure of inflation,” rose at a 2% annualized rate last quarter. That was the second straight quarter that the core PCE index increased at a 2% annualized rate. Coincidentally, the central bank’s annual inflation target is 2%.
Moreover, multiple Fed members, including Austan Goolsbee, Christopher Waller, and Raphael Bostic, have signaled recently that rate cuts are on the way.
I also expect the central bank to be heavily biased towards cutting rates this year because Fed officials, like most Washington bureaucrats, support the reelection of President Joe Biden. By boosting the economic expansion, salaries, and stocks, rate cuts will help Biden’s chances of being reelected.
Stock Market: Good News Is Good News Again
The Street has finally realized that inflation can drop without triggering high unemployment and a recession. That’s because inflation is primarily caused by excess money supply in the economy, while economic growth in the U.S. is primarily a function of the labor market’s strength. And the money supply can be reduced without causing a recession if companies still have the funds to expand and hire more workers. Primarily because of the Fed’s largesse during the pandemic, along with the Payroll Protection Program, many years of low interest rates, and the high salaries that workers had been getting, which allowed consumption to stay strong, most firms did indeed have enough funds to expand and hire more employees over the last two years, despite the decline of the money supply amid higher interest rates.
Speaking of higher rates, the Street has also finally dropped its long-held but mistaken belief that elevated rates automatically cause a recession and trigger reductions in corporate earnings.
Rate hikes did not cause a recession in the mid-90s and did not trigger one in 2022 or 2023. Moreover, despite the elevated rates, companies’ profits rose in the third quarter versus the same period a year earlier, and they are expected to have done the same last quarter.
Given these points, along with the Fed’s apparent determination to cut rates this year, the Street has given up its view that “rates are everything” for stocks and its habit of viewing “good news (for the economy) as bad news” for stocks.
For example, on Jan. 25, the day that the GDP data “blew estimates out of the water,” the S&P 500 rose 0.5%. If the same data had been released six months ago, the index probably would have sunk 1%.
This turnaround has removed a major obstacle to stock rallies and bodes well for the outlook for stocks going forward.
Geopolitical Issues Probably Won’t Derail the Stock Market
On Jan. 28, a drone attack, apparently conducted by Iranian proxies, killed three American soldiers in Jordan. President Biden said the U.S. would respond to the strike.
But the Biden administration has been quite dovish towards Iran in the past, failing to attack the Middle Eastern nation or even meaningfully intensify sanctions against it in response to many past strikes by Iran-backed militias that injured American troops. Therefore, I don’t expect the U.S. to conduct any massive attacks that will drastically change the situation in the region.
Additionally, there are many indications that Israel plans to stop its war against Iran-backed Hamas in the not-too-distant future. Such a development should lead to Iran ratcheting down the operations of its militias against the U.S. and other Western nations relatively soon.
Given these points, I don’t expect developments in the Middle East to cause a major pullback in U.S. stocks.
Finally, I don’t anticipate major changes in the world’s other hotspots –Ukraine and China/Taiwan — before the U.S. elections in November. That’s because neither Russia nor China will want to make moves that could hurt their preferred candidates in the American contest.
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.
